Apratim, the problem with those numbers is that they are really used to rationalize the market rather than explain it mechanistically. In other words, investors feel good about the future so stocks get bid up. Financial academics sit around thinking of ways to modify the parameters in existing valuation models to make them work. It is all post hoc stuff, and I like predictive models. That is the point of contention that I have with David Stern. Instead, I've been focusing on relative valuation. The advantage to this is you don't need to worry about the valuation parameters, since they cancel out. I've come up with CNPEG to deal with this. Humility prevents me from telling you what the "C" stands for, but NPEG stand for normalized Price to Earnings Growth.
Basically, you take the PEG of the company under consideration and divide it by the PEG of the S&P500. Anything under 1.00 would be considered undervalued.
Here is a source for some PEG data (but you need to rework these because PEGs should be long term [5 year] growth rates):
biz.yahoo.com
Now, let's apply this concept to Dell. Earnings next year are expected to come in at around $1.50, and I am forecasting the five year growth at a minimum of 40%. This yields a PEG of around 1.05. By contrast, The S&P has a PEG of around 2.9. Applying the CNPEG approach we get a normalized PEG of 0.37.
I interpret this to mean that regardless of the parameters used to generate the valuation models, Dell is valued much lower than its S&P brethren. In fact, the implied growth of Dell is around 15%. So if you believe, as I do, that Dell will grow substantially faster than 15% over the next five years I think you must conclude that Dell is a buy.
TTFN,
CTC |
