Ivy: Thanks for the post and the Morningstar article. It's mention of CTYS (Cityscape Financial) brings up a subject I think needs discussion, because this is a stock I know something about.
The problem with PEG valuation is the "EG" part. Do you use last year's earnings growth? If so, something like, say, SFLX looks great. However, if you go back another year, you will see SFLX's earnings were depressed last year, and so the growth is only to previous levels even though it it a large percent. Do you use 3 or 5 year CAGR (compound annual growth rate)? Then you end up with Timberside Software or Qualix, which have had great growth in the past but have limited future growth potential. Or do you use estimated growth for the following year? This makes the most sense, obviously, but has the downside that next year's earnings are speculative, which the Morningside article acknowledges for microcaps.
In Cityscape's case, the fabulously low PEG is because the company may be in a lot of trouble. There are extremely distasteful stories of CTYS turning crippled people out of their homes by foreclosing on usurious second mortgages, when the borrowers say they didn't understand the terms. See London Times, I think it was August 16 or 18. It's available for free on the web. Or believe me, I read the article and it's pretty bad, although the Times has a notorious liberal/anti-business bias. It also tied CTYS to some people with track records for fraudulent transactions. So the UK has cracked down on CTYS's UK operation and CTYS had to increase loan reserves, change loan practises, etc.
My conclusion: low PEG is just a flag to investigate the underlying reasons. Some stocks, like (I believe) York are simply overlooked. Some (like Timberside, I think it is TMBS, and excellent company but with rapidly slowing growth) are based on misleading figures, since the growth is probably not sustainable.
By the way, I am very long on Cityscape. I think the problems are completely blown out of proportion and they have an excellent business, and that the stock price is depressed because so many people got burned in the Mercury Finance debacle. Cheap credit, like outsourced telephone solicitation/service (see APAC, TTEC, or even better ACTC) , is a fairly sleazy business and dangerous to investors. But I think CTYS is a great buy at these prices and is going to soar on the next earnings report.
My point: there is always a reason for low PEG, so be careful, investigate thoroughly, and if you like it, buy it. |
