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Technology Stocks : Dell Technologies Inc.

DELL 127.61

+0.8%

3:59 PM EST

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To: Geoff Nunn who wrote (51752)	7/16/1998 6:49:00 PM
From: Chuzzlewit	Read Replies (2) of 176387

Hi Geoff, I'm glad that you're finding my normalized PEG ratio interesting. First, a PEG ratio is supposed to be a quick and dirty valuation method. The idea is that a stock shouldn't be selling at a forward P/E of greater than its long term growth rate. The problem is that the PEG doesn't take into account such niceties as inflation rates and risk free market rates of return. The problem is that these rates are not so easy to figure out. In addition, the issue of riskiness of the forecasts is conveniently ignored. So, by comparing the PEG for any particular issue you can at least normalize for discount rates using stocks of average riskiness. Jim Leon suggested using more narrowly defined PEGs like a NASDAQ PEG. I'm still mulling that one over. It doesn't make sense to adjust for dividends, since dividends have a simultaneous effect by decreasing future earnings and decreasing the price of the stock. If the earnings were to stay within the company, presumably it would experience greater growth through reinvestment, and it would also have a greater stock price. Therefore, the effect of earnings would wash because both the numerator and denominator would increase proportionately. While I think dividend adjustments don't make theoretical sense pre tax, there is a tax consequence to be calculated. Since dividends are taxed as ordinary income they are less tax efficient than reinvestment which is taxed as capital gains. So all other things being equal, a dividend paying stock should have a lower P/E than a stock paying a dividend. Maybe when I have a chance I'll work out the math on this. Just bear in mind that the "normalized PEG" was intended as a quick and dirty relative valuation tool. TTFN, CTC

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