SubscribePEG Ratio Plays
September 21, 2007
I am often asked to explain what is the PEG Ratio. This is a great tool to help understand the valuation of a stock in the context of the future earnings potential. This is a tool that should be used in conjunction with others in order to discern of the stock is reasonably valued.
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At the bottom of this post is a listing of those stocks that have PEG Ratios significantly below their peer group. The MSN Money Stock Screener was used to find candidates within the Large Cap Universe of the S&P 1500.
Excerpt from The Disciplined Investor - (from pages 84-85)
The P/E ratio is helpful when looking at the relative valuation of one stock as compared to another, but it is only useful when accompanied by the understanding that it should only be used to compare stocks in similar sectors and industries. It would make no sense at all to compare the P/E of a utility stock to the P/E of a technology stock—that would be like comparing apples to oranges.
To level the field, an excellent derivation of the P/E ratio is used to see if a stock is valued fairly compared to its own future growth. This is called the PEG ratio - or earnings to growth ratio.
PEG RATIO
The calculation: price/earnings (P/E) ratio divided by expected per-share earnings growth over the next year.
More than likely, a result that is less than one tells us that we may have a good investment that is undervalued for the time being. On the other hand, a result of more than one is usually a sign that the position is valued higher than it should be. Originally, the PEG Ratio was developed to look at stock statistics in more than one dimension. By adding expected growth to the P/E ratio, it will effectively provide a comparison tool to level the paying field when valuing stocks.
Originally, the PEG Ratio was developed to look at stock statistics in more than one dimension. By adding expected growth to the P/E ratio, it will effectively provide a comparison tool to level the paying field when valuing stocks. Small to Mid-Cap stocks are well suited to utilize the PEG Ratio as the initial screening tool since they usually pay little or no dividends. In effect, is a good tool for some stocks that are usually more difficult to value using traditional methods.
Just as it is true that the ratio is beneficial for smaller stocks, larger stocks should have an additional requirement to help create a more usable and more appropriate valuation tool. By simply adding an overlay of dividend yield along with the earnings, a much better outcome can be crafted for largecap stocks.
Here is a quick guide for using the PEG Ratio as a part of your investment disciplines:
PEG Ratio Signal Guide
.50 or less -> Strong Buy
.50 to .75 ->Buy
.75 to 1.00 ->Hold
1.00 to 1.25 ->Possible Sell
1.25 to 1.75-> Consider Shorting
Over 1.75 ->Short/Sell
TOP 5 as of 9/21/2007- (RIG) (NE) (AVP) (MUR) (MOLX) (MNST)
CLICK BELOW FOR LIST
The Disciplined Investor - In Stock and Shipping
September 19, 2007
It is finally here!
The book looks great and is now available at a few select bookstores (Amazon, Borders..) as well as THE DISCIPLINED INVESTORE. As this is a very exciting time, I hope that you will help to spread the word by letting your friends and colleagues know about it. I have been told that later this month it should become available in many fine bookstores (local and chains).
Follow Up: Amazon seems to have inventory issues and may show a 4-6 week delivery period. That is NOT correct. They receive shipments daily, so please disregard if you are considering purchasing through that outlet as the “glitch” will be corrected and books are actually shipping daily.
If you were waiting to get your copy (as many of you have expressed interest) - now is the time… Click on over to our new Online Store or the Amazon Link to get a peek. The book is also indexed and some of the pages are viewable online through Google Book Search.
The Disciplined Investor will help you:
Eliminate emotion from your investment decisions.
Match your investment strategy to your risk tolerance.
Learn why asset allocation is so important for a portfolio.
Discover tools for monitoring your portfolio’s performance.
Understand sell stops, short-selling, diversification.
Learn about the insider tools professionals use everyday
Quant Investing Primer
June 20, 2007
From Chapter 2 - Quantitative Investing - The Disciplined Investor
(starting on page 29)
“Momentum Earnings Up
You will undoubtedly find many stocks that you have probably never heard of within these results. Caveat emptor! Try not to let yourself get sucked into the temptation of following the historic returns. Be sure to keep a cool head and think about the company and its longer-term prospects. Contrarian plays have long been attractive strategies for those investors who do not have the stomachs for high-ratio stocks. By its very nature, this type of strategy will search for those stocks that have fallen from grace within the eyes of the markets. It will also find ones that have never caught fire while growing at rates appropriate to its underlying fundamentals.
GARP
Somewhere in between the world of growth and value investing is the GARP (growth at a reasonable price) patron.
This theory, popularized by Acorn Fund manager Ralph Wanger (also the author of A Zebra in Lion Country), focuses in finding opportunities with a modest risk within the realm of Read more
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