Re: PEG and FCF, a couple of thoughts--
1. PEG is a perfectly worthwhile tool. But it is a screening tool. It is a first step, intended to winnow the field down to a manageable few that you can look at in detail. It's helpful partly because it's so easily obtained, being available on any number of sites (based on analysts' consensus earnings, of course).
2. Free Cash Flow is a logical next step, giving a good view of how the companies' money runs. (Note the plural--if you ran PEG first and decided to look at several companies, it makes sense to look at each of their FCF's to get an idea whether they are worth looking at further.
3. Of course, we're still not done after we've looked at FCF. Then, we should be looking at the company's business model in real detail, to see if our projections and discount rates hold up.
[Note: I tend to work the opposite way, however. Lately, I've been finding interesting business models and situations, and then investigating the numbers. Do as I say, not as I do, perhaps.).
4. Pirah, a wrinkle on your approach. I have tended to estimate a future growth rate, and estimated how far out I can carry that rate. After that I assume growth suddenly reverts to the market. For instance, I feel confident that Cisco will grow at 30%+ p.a., for 7 years. After that growth is the market's. That way, I can assume that the company's future P/E--or P/FCF--should match the market's at some point. It's a bit of a shortcut that seems not to lose too much in the process.
Pirah, keep it up. This is great stuff!
Best,
John |
