In early May, I wrote a column titled Are Growth Stocks Undervalued? In it, I pointed out that these stocks carried reasonably modest valuations on a historical basis, at least when comparing their price-to-free cash flow metrics to their growth rates.

As clear proof of my market-timing savvy, the tech-heavy Nasdaq has soared nearly 35% since that column was published. Of course, if you know me, you know I know no one can time the market (and that I also like to write tongue-twisting sentences). As I said then, "I'm definitely not calling a bottom here. If growth stocks were to touch an all-time low, for example, they'd still have another 22% to fall."

The purpose of the article was to point out that although many were questioning the market's valuation, the downside risk for long-term investors was as low then for growth stocks as it had been for quite a long time. So, with the huge rise in the Nasdaq and other indexes since then, I thought it would be instructive to go back and update the numbers in that column to see if we could detect a discernable swing in the historical pendulum.

Here's what the price-to-free cash flow-to-growth numbers (P/FCF-G) looked like then for the S&P 500 and the S&P 500/Barra Growth Index. (I'd rather compare P/FCF to actual free cash flow growth, but that information is hard to come by, especially going back 27 years. Earnings growth numbers are readily available and downloadable from Barra, and over time earnings growth is a good proxy for free cash flow growth.)

    27-year P/FCF-G averagesS&P 500                1.83S&P 500 Growth         1.84HighsS&P 500 (1993)         2.69S&P 500 Growth (2000)  2.77LowsS&P 500 (1985)         0.97S&P 500 Growth (1985)  1.00Jan. 31 P/FCF-G ratiosS&P 500                1.53S&P 500 Growth         1.29                 % below avg.   % from lowS&P 500               16%            37%S&P 500 Growth        30%            22%All data from Barra

Since 1977, investors have assigned S&P 500 stocks a P/FCF multiple that, on average, is 1.83 times larger than their growth rate. That multiple is virtually the same for the S&P 500/Barra Growth Index. As of Jan. 31 of this year, those P/FCF-G multiples were sitting at 1.53 and 1.29, meaning they were 16% and 30% below the average, respectively. (Reading over the May column again will help make things clearer.)

Here now are the latest numbers available:

    Current P/FCF-G ratiosS&P 500                1.55S&P 500 Growth         1.28

So, despite an approximate 15% rise in the S&P 500, its valuation on a P/FCF-G basis has risen just 1%. The S&P/Barra Growth index climbed some 14% over that period, yet its multiple is virtually the same.

Now, I'm not about to draw any strong conclusions from this one bit of information. I'll just say that now, as earlier this year, valuations are somewhat below average in a historical sense for the S&P 500, and quite a bit below average for growth stocks. But indexes can stay below average for a long time, so I'm not predicting a near-term rise in prices. I will say that if you own an S&P 500 fund or some type of growth-stock index, you shouldn't pay much heed to those who say the market is severely overvalued, as long as you plan to own the index for the long term.

An index is one thing, of course, and individual stocks are another. I looked at the multiples of several companies in May, and wanted to update those as well.

                                  May    Current
Stock P/FCF-G P/FCF-G Change
Microsoft (NASDAQ:MSFT) 1.01 1.22 +21%Cisco (NASDAQ:CSCO) 1.37 3.57 +161%eBay (NASDAQ:EBAY) 0.79 1.02 +29%Dell (NASDAQ:DELL) 1.66 1.26 -24%Pepsi (NYSE:PEP) 1.50 2.03 +35%Constellation Brands (NYSE:STZ) 0.65 0.60 -8%
Most data from Multex

I used Multex Investor for all numbers above except for Pepsi's, because of some oddities I couldn't reconcile.

Cisco raises the biggest red flag in this group with a multiple significantly higher than four months ago. Its stock price has risen about 40%, while its growth rate plunged. Dell's valuation, on the other hand, improved the most. Constellation Brands, a maker and distributor of wines and spirits, is most attractive on an absolute basis. However, its multiple is based on a trailing five-year growth rate of 29%, and forward estimates call for a more moderate 15% growth. (The company has long targeted 15% growth, but has easily exceeded it in the past.)

As I mentioned in my first article, it's instructive to use forward growth estimates if you can put any trust in them. Multex gives it a good shot in its earnings estimates section (free registration required). Some stocks won't be greatly affected; in the above list, Microsoft's and Pepsi's forward estimates are relatively close to their actual trailing growth rates. eBay, however, has an 83% trailing rate, but a 43% forward estimate. Thus, its forward P/FCF-G multiple would nearly double to 1.94.

If you own individual stocks, it would be helpful to try some of these calculations for yourself. If you're handy with a spreadsheet, just plug the numbers in and update them each quarter. Over time, you'll build up a database that will let you know where your companies stand on a historical basis.

Rex Moore has calculated the value of pi out to 12 slices. At time of publication, he owned shares of Microsoft, eBay, and Constellation Brands. The rest of his holdings can be viewed here, and the Fool's disclosure policy there.