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Strategies & Market Trends : Buffettology

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To: Chuzzlewit who wrote (741)	12/23/1998 8:24:00 PM
From: cfimx	Read Replies (1) of 4691

>>First forget P/E because it is like driving a car with your view provided by the rear view mirror. The P/E concept was devised by Ben Graham as shortcut for valuation. It works well enough for stocks that aren't growing, but it is pretty dismal for growth companies.<<< you just spent half your post bashing the p/e ratio. Now a paragraph later you USE IT to justify Dell's valuation? >>Now back to the valuation issue. DELL may earn around $1.60 next year, giving it a forward P/E of around 44. Conservatively speaking, Dell has a five year growth rate estimated at around 40%. The S&P has a forward P/E of around 24 with a long-term growth rate of around 11% (looking past the current year). What I do is calculate the YPEG for the S&P and divide that number into the YPEG of the target stock to give me a normalized PEG (so-called CNPEG). If you do this you get a CNPEG for DELL of around 0.50. The interpretation of that metric is that you can buy growth through DELL at roughly 50% of what it costs in buying the S&P. How's that for value?<<

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