Undervalued Stocks = Low P/E to Growth Ratios Message Board

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Undervalued Stocks = Low P/E to Growth Ratios

Public Reply Prvt Reply Mark as Last Read File

Previous 10 Next 10 Previous Next

To: Mason Barge who wrote (137)	9/10/1997 9:10:00 PM
From: Doug Rife	of 297

A short-sighted market spells OPPORTUNITY!! You might read "What Works on Wall Street" by Jim O'Shaughnassy who is scheduled to appear on CNBC on Thursday. I'm sure he will mention WDC for another reason: low price to sales (p/s) PLUS high 1 year price appreciation. His research tested many different strategies via computer simulation from 1951 thru 1995 using the complete Compustat historical stock data base. He didn't actually test the low PEG idea by using forward looking earnings growth for G but when he tried using historical G (up to the previous 5 year growth rate) the results were disappointing no matter what valuation he used (PE, P/S, ROE, p/b). In fact there is nothing I can find in his book that would be a proxy for PEG using growth expectations except 1 year price appreication. If a company is expected to grow that should be reflected in the LONG-TERM momentum of its stock price at least as long as the market is not misperceiving growth. It turns out that buying low p/s companies (< 1.5) having the highest 1 year price appreciation wins over all other backward looking stategies by a wide margin. My sense is that PEG may have an edge because it incorporates much more data than mere past price appreication. Stocks can go up fast for no other reason than they have been going up fast (pure monentum investing). Looking at growth prospects without being influenced by price moves per the PEG approach seems better. We all get excited when a stock we like goes up. It's only natural but can be misleading. Better to forget about price moves and invest soley on 1 year forward PE and 5 year forward growth estimates. My sense is that O'Shaughnessy's approach mostly catches turn arounds and not solid long term growers. It could catch long term growers but only by chance since even slow growers can have big 1 year price moves and low p/s but his method does not care if it buys growth stocks like Intel or a cyclicals like IP. His turnover rate is very high (75%) becasue once companies turn around they often go back to slow growth again. Better to use PEG becasue you have a means to lock into real growth stocks when they are way down.

Report TOU Violation

Share This Post

Public Reply Prvt Reply Mark as Last Read File

Previous 10 Next 10 Previous Next