Yes, of course Mike, you were correct to send me back to the Foolish PEGulator to revisit my information and do it using the Fool Ratio. Not only is the PEGulator interesting - it's a gas to use. I don't even know why I added the PEG's into my post of reporting the PSR's after Friday's close because it is not a metric I use for large-caps. My mistake.
We should point out that the Fool Ratio (PEG) was developed to primarily measure small and mid-cap growth stocks and is only one indicator of a stock's potential value. Based on the Fool Ratio's buy and sell table below, we all should have been shorting Qualcomm, Microsoft, Cisco, Siebel and many others over the past couple of years instead of doing the reverse and buying or holding them long term. Hence, the use of PSR as a gorilla metric and not relying on any one specific metric.
fool.com
Here's the Fool Ratio guidelines when using this PEG:
WITH FOOL RATIO TEND TO
.50 or less Buy
.50 to .65 Look to buy
.65 to 1.00 Watch (or "hold")
1.00 to 1.30 Look to sell
1.30 to 1.70 Consider shorting
Over 1.70 Short
There are certain stocks and companies that the Fool Ratio PEG should not be used for when evaluating. These include:
-----
*Please note that the Fool Ratio should not be applied to every situation. We ignore the Fool Ratio (and generally these stocks as well) for the following industries: airlines, banks, brokerage houses, leasing companies, mortgage companies, oil drillers, and real-estate companies. (The list may not be complete, since new industries spring up from time to time, but it's our best shot.)
These industries, for their different reasons, have low P/E's that virtually never reach their growth rates, mainly because their companies are valued off assets they hold (like oil deposits and real estate) rather than operating earnings. The Fool Ratio also has nothing to say about companies with negative earnings, since no P/E exists and determining growth rates (if any) often involves too much guesswork.
*And finally, the larger the company, the less we rely on the Fool Ratio to guide us. That's because, again, the bigger a company is, the less likely it is to be valued purely off of earnings.
The greatest beauty of the Fool Ratio is its ability to confer to the average investor a sense of at what price a given stock is a good buy and at what price a good sell. We view this as profoundly important, since the Ratio can ultimately help guide its fans into both long and short positions, seeking to profit up and down at the same time with different stocks.
-----
My previous PEG's on the post yesterday for Siebel and Qualcomm were not the results of plugging in the data to the Foolish Ratio version (obviously), but Intuit's version of calculated online results. Since I hadn't looked at the PEG's in many months and usually look more closely at the PSR for the Gorillas, I didn't even blink when I saw them. Hmmmmm.....after searching the site, I still don't know exactly what numbers they use to plug in and calculate their version of the PEG at the Quicken site.
However, the 'growth view' states this on the Quicken site:
quicken.com
"P/E-TO-GROWTH RATIO (PEG)
As a growth stock manager, I'm used to seeing high P/Ss and P/Es. I understand that by the very nature of their growth rates, these companies are highly thought of. That doesn't mean that I don't try and put a price tag on that growth. One of the best, and simplest, ways to do that is by looking at the PEG ratio. The PEG ratio divides the P/E by the annual forecasted earnings growth rate. The higher the PEG, the more you're paying for the earnings growth. For the ratio to have meaning, the P/E and annualized growth rate must be representative of actual growth in the company. For example, if a company's earnings go up from 10 cents a share to $1.00 a share, that shows up as a 1000% growth rate, and the PEG ratio would appear very attractive. But in reality, if you project that growth out over a few years, you'd see that the long-term trend is much slower. That one-time earnings spurt could be due to a one-time event. (You can also derive a PSG ratio using projected sales.) While I generally seek PEGs below 1.5 (which can also be expressed as 150%), I typically try and compare PEGs of similar companies in order to develop a sense of whether or not a particular PEG is reasonable based on the valuations the market places on its peers."
If I take the data from the Intuit/Quicken site (P/E divided by 100*[(F/E)4/q - 1] where P=Current Share Price, E= Earnings for the last 12 months, F=Future Earnings Estimate and Q=Number of Quarters) and do it by hand or plug it into the Foolish PEGulator - I get a much different result than what Quicken lists as the PEG on the Quicken site. Interesting. I would be curious to know if anyone can shed light on the Quicken site's PEG calculator and how often it is updated.
Thanks Mike for sending me back to revisit the Fool Ratio. Perhaps the Fool Ratio PEG could be used in comparison of all our Gorillas and candidates as a snapshot view in conjunction with the PSR snapshot view. Developing a historic chart for comparison's sake within the gorilla game might be an interesting study for all of us to see how effective such a metric has been in the past to gauge against how it could be used in the future.
You can see what kind of money would have been left on the table by using the guidelines of the Fool Ratio buy/sell/hold/short chart in stocks like Siebel, Qualcomm, JDS Uniphase, i2, Microsoft, Cisco and many others - not to mention the loss of money had one 'shorted' when those PEGs were beyond the 1.7 point. It hurts to even think about that and I hope no Fool's were applying this to gorilla game investing.
BB |
