Valuing a stock is a lot like buying a car. There are lots of great cars out there, but the sticker price may be more than the actual worth of the car. Some manufacturers command a premium price because their cars have a certain cachet, not because their cars are necessarily more reliable or of better quality than others on the market.
It's the same thing with stocks. Some stocks are valued much more richly than others because they're hot or popular with investors, not because the companies are more profitable or have better growth prospects. The ability to decide whether a company's stock price accurately reflects its performance is the heart of stock valuation.
What Is a Stock's Value? >>