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Technology Stocks : Internet Analysis - Discussion
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To: Joe E. who wrote (38)2/2/1999 1:33:00 PM
From: Chuzzlewit  Read Replies (2) of 419
 
Joe, I agree, but since so many posters on SI haven't the vaguest idea of financial mathematics, I didn't want to broach that issue on the AOL thread, so I took the easy way out <VBG>. But you are absolutely right -- we should be looking to the market to dictate the appropriate discount rates to us, rather than the other way around.

For better or for worse, I've come up with a metric I call CNPEG [for Chuzzlewit's normalized PEG]. Since most independent financial analysts agree that there is no good way to value a stock in absolute terms, maybe we can do it in relative terms. So, I use the YPEG as a starting point. [The YPEG is the year ahead P/E divided by the company's expected long-term growth rate]. There are two obvious problems with YPEG. The first is that it is insensitive to long-term interest rates, and the second is that it does not take into account the relative risk of the equity. The CNPEG is the ratio of the YPEG of the stock under consideration divided by the YPEG of the S&P500. This gets around the interest rate problem but doesn't address the risk problem. I am considering including the betas to address this issue.

In that case we would have:

(stock's YPEG * stock's beta)/(YPEG for S&P500)

Since the beta for the S&P500 is 1 by definition, This may solve the problem. In any event, it speaks clearly to the issue you raise concerning the use of the market as a comparitor. What do you think of this approach?

TTFN,
CTC
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