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Posted: 3/13/2002 4:54:38 PM EDT
I know, I know, "price/earnings*growth". But what does a number of 1.6 mean? How high must real growth be to really justify it?
Link Posted: 3/13/2002 5:47:40 PM EDT
If a company has annual earnings growth of 40%, and is valued at a P/E of 40, it has a PEG of 1. Let's say that people have lost confidence in the company and it has sold off in an over reaction down to a P/E of 20. It's PEG would be .5 then.
Link Posted: 3/13/2002 9:02:25 PM EDT
Thanks, Shooter69. Is it that simple?? As growth gets higher, P/E shouldn't go up linearly with it, should it? Does this tie into the "rule of 72" somehow? I am curious because I'm considering shorting a stock with a PEG of around 1.6, P/E of around 32, and the company's earnings growth (analysts' guesses of it for this year and next, anyway) is 18%. The real earnings growth will be -- IMHO -- more realistically around 6%.
Link Posted: 3/13/2002 10:06:34 PM EDT
Originally Posted By 71-Hour_Achmed: I am curious because I'm considering shorting a stock with a PEG of around 1.6, P/E of around 32, and the company's earnings growth (analysts' guesses of it for this year and next, anyway) is 18%. The real earnings growth will be -- IMHO -- more realistically around 6%.
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Haven't given up your gamblin' ways, eh Achmed? [;)]
Link Posted: 3/13/2002 10:28:21 PM EDT
Originally Posted By The_Macallan:
Originally Posted By 71-Hour_Achmed: I am curious because I'm considering shorting a stock with a PEG of around 1.6, P/E of around 32, and the company's earnings growth (analysts' guesses of it for this year and next, anyway) is 18%. The real earnings growth will be -- IMHO -- more realistically around 6%.
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Haven't given up your gamblin' ways, eh Achmed? [;)]
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It's a good bet! [:p]
Link Posted: 3/14/2002 12:03:41 AM EDT
[Last Edit: 3/14/2002 12:04:36 AM EDT by BYU]
PEG Ratio is short for price-earnings-growth ratio and is the mathematical expression of the price-earnings ratio divided by the annualized growth rate (%). If the number is greater than one, the company's price-earnings valuation is outstripping its growth -translated-the stock is overvalued in the current market. If the number is less than one, the company's price-earnings valuation is lagging behind the growth rate-translated-the stock is undervalued in the current market. The PEG Ratio works best with small and middle capitalization companies. I suggest that you check [url]www.fool.com[/url] for more insight into the PEG Ratio. PEG= (Current Market Price per share/Earnings per share) ------------------------------------------------------- Annualized earnings growth rate
Link Posted: 3/14/2002 5:41:36 AM EDT
Forget all this investor double speak. Stock price performance is essentially a stochastic process. Voodoo magic. Bad juju. You're better off taking your money to Vegas.
Link Posted: 3/14/2002 6:22:39 AM EDT
Originally Posted By marvl: Forget all this investor double speak. Stock price performance is essentially a stochastic process. Voodoo magic. Bad juju. You're better off taking your money to Vegas.
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Been there, done that. [:D]
Link Posted: 3/14/2002 10:21:27 AM EDT
[Last Edit: 3/14/2002 10:22:16 AM EDT by shooter69]
Originally Posted By 71-Hour_Achmed: Thanks, Shooter69. Is it that simple?? As growth gets higher, P/E shouldn't go up linearly with it, should it?
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It often does, which is why you see stocks with P/E's of a 100. People are betting that it will continue growing at that rate. Everyone is looking for the next Microsoft. Of course that is a generalisation when you consider that a 100 P/E stock may simply have had it's (modest growth rate) earnings pull back to near flat and people believe that they will bounce back in the next quarter, etc. You have to understand the story and why the street is valuing it as it does.
Does this tie into the "rule of 72" somehow?
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No
I am curious because I'm considering shorting a stock with a PEG of around 1.6, P/E of around 32, and the company's earnings growth (analysts' guesses of it for this year and next, anyway) is 18%. The real earnings growth will be -- IMHO -- more realistically around 6%.
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As you've stated the facts, yes the company does seem to be overvalued based on the PEG, and especially your own analysis of it's earnings growth. Remember that timing is everything. I rarely make a trade simply on the basis of fundamentals, but that's me. Care to share the name or symbol of the company?
Link Posted: 3/14/2002 12:10:57 PM EDT
For heaven's sake do not follow the advice of an analyst. Those guys couldn't find their asses in a phone booth with a 1KW spotlight. Indeed, there are those that feel stock analysts are good contra-indicators, that whatever they predict, the opposite will happen. At the end of 2000 I had a large number of shares of a semiconductor stock that were running about $80 to $90 a share. The analysts said it would be $200 in a year or so. It's now running about $7 a share. What did I do? I followed the analyst's advice and waited for that $200 figure. Ask me what I'm worth now. [rolleyes] Trying to make money on stocks is not very far removed from gambling, especially when you start getting fancy with shorts, options (puts and calls), and the like.
Link Posted: 3/14/2002 8:28:44 PM EDT
MarvL, believe me, I know that stocks have their risks, and I know options have even more types of risk to worry about. I've been doing fairly well so far on them, though. Shooter69, the symbol is GNTX. It just got downgraded yesterday by one analyst (and dropped about 1.62) after an annual report that sounded cautious to me, but is still near its 52-week high. It's been climbing steadily for the last year despite downgrades, insider selling, and the stock market drop. My growth guess is based in part on their annual report's mention of increases in materials costs, pricing pressure from their customers, slowing sales in their old business (fire-suppression-related items), a slowing in car sales after the "0% financing" deals have ended, and their foray into "white LEDs" as their next great product. I think this new product concept is why their price is high now; I recall a company named ReadRite (RDRT) which soared after announcing they were changing from making disk-drive heads to fiberoptics, during the height of the fiberoptic bubble. Then there was Zapata, the fish-oil processor that decided it wanted to buy Excite to get into the Internet game. [rolleyes] After these two, I have become skeptical when a company announces that to get out of a saturated and well-understood market they're going to go into some hot new area. But I may be drastically wrong. Hey, I told my father in 1987 that Microsoft's products were so bad that they'd never survive in the market, and that Apple and the Motorola 680x0 processors were the way to bet. [>(]
Link Posted: 3/14/2002 8:50:29 PM EDT
Originally Posted By BYU: PEG= (Current Market Price per share/Earnings per share) ------------------------------------------------------- Annualized earnings growth rate
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Well there ya go!! Rule of 72 is a simplistic way of figuring out how long it would take your money to double give a certain interest rate. The key to stocks is not to day trade em. Look long term. Be wary of stocks that have rapid price increases unless there is at least a 5yr history showing this as a normal phenomena for the particular issue. Always have a specific price to sell on the up side and stick to it. Do not become bullish on a stock just because you own it. So also have a specific sell price on the down side. Also on the down side, be prepared to buy in on the short term to avg out cost. Unless of course the stock is tanking. There in lies the trick to it all. Indentifying a stock that is in a free fall vs stock that is just temporarily out of favor.
Link Posted: 3/15/2002 8:18:48 AM EDT
Down .62 as I type this. [:D] "Hey kids! We eat tonight!" [:E]
Link Posted: 3/18/2002 1:01:50 PM EDT
Originally Posted By 71-Hour_Achmed: Down .62 as I type this. [:D] "Hey kids! We eat tonight!" [:E]
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And another .60 today. [:D] "Hey kids! We eat tonight!" [:E]
Link Posted: 3/19/2002 7:26:15 AM EDT
How many kids have you got, Achmed?
Link Posted: 3/19/2002 7:28:44 AM EDT
Originally Posted By lordtrader: The key to stocks is not to day trade em. Look long term. Be wary of stocks that have rapid price increases unless there is at least a 5yr history showing this as a normal phenomena for the particular issue.
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WTH kind of trader are you anyway? Mr. Conservative fuddy duddy I guess...
Link Posted: 3/19/2002 10:09:39 AM EDT
Originally Posted By shooter69: How many kids have you got, Achmed?
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None yet. I am merely quoting my hero, Cletus from The Simpsons. [:E]
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