Peg Ratio 4s426g

PEG RATIOS What are they?

How are they useful? Presented by Putra Bridge & Benjamin Lunsford

Classic Investing Strategies ► Growth

– “I buy companies that are growing rapidly.” (high earnings growth) ► Value –“I buy companies that are trading at a cheap price.” (low PE Ratio) ► PEG Ratio is a ratio between a given PE Ratio and the Growth Rate ► “I want the companies growing rapidly, but I don’t want to pay too much.”

P/E RATIOS Price-to-Earnings Ratio Quotable quotes from Prof. Demong: “In the business of investing, they project forward earnings to make their PE ratios” “In the newspaper, they use trailing earnings for their PE ratios” “It’s up to you to decide if a PE is too high or too low for that company”

PEG RATIOS 

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A good way to help “decide if PE is too high or too low for that company” PE-to-Growth Ratio Just like earnings, one might use either trailing or forward growth rates Can use many different time periods – know what your source was using when evaluating a PEG Ratio you see in print

PEG RATIOS

PEG RATIO =

PE RATIO EARNINGS GROWTH (ANNUAL RATE)

PEG RATIOS

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Try it out! If my company’s forward growth rate is 13% and the forward PE Ratio is 39, what is the forward PEG Ratio? 3.0 If my company’s forward growth rate is 24% and the forward PE Ratio is 36, what is the forward PEG Ratio? 1.5

PEG RATIOS 

Which is better?

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The lower, the better! The official “sweet spot” varies, you can you think of it as 0.75 to 1.50 … many successful investors aim for right around 1.0

THE LOWER THE BETTER!! 

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For past five to ten years, it has been easier to find smaller companies with PEGs in the sweet spot. Typically, Small caps have always had higher growth rates than larger caps. Only in the past decade have they had lower PEs as well. What does this mean for us? In today’s market, very few large caps have decent PEGs

Some Example Companies (Chosen at Random) Large Caps

P/E

Growth

PEG

Coca-Cola

23

11%

2.1

Kellogg

18

9%

2.0

Microsoft

26

12%

2.2

Small Caps

P/E

Growth

PEG

Aeropostale

20

23%

0.9

Carmax

30

22%

1.4

PetSmart

26

20%

1.3

!WARNING! Can’t just invest by selecting lowest PEG ratios you see on screening model.  Must perform due diligence and research quality of earnings and growth rate.  If earnings and growth rate projections are legitimate, PEG ratios are a very useful tool. 

EXAMPLE 

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…of a serious PEG disciple: John Montgomery of Bridgeway Funds His Bridgeway Aggressive Growth Fund (BRAGX) is a consistent performer #1 out of 350 funds in Mid-Growth category for last five years

QUESTIONS?