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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: JRH who wrote (3216)	6/27/1999 9:37:00 PM
From: Mike Buckley	Respond to of 54805

Len, The Motley Fool has an online caluclator that calculates their version of the PEG. They also have a free, downloadable Windows-based calculator that resides as a file on your hard disk. Because I favor their method the best, I use them. However, I can run the same calcuation using a financial calculator or a spreadsheet. It goes as follows: First determine the PE ratio. Plug whatever earnings you desire to arrive at the PE ratio. For small- and mid- caps I usually (not always) prefer using trailing earnings excluding one-time charges and gains. Having arrived at the PE, we then need to determine the growth rate. The Fool method is to determine the annualized rate of growth from the trailing earnings to the furthest consensus estimates. Their online calculator determines that growth rate behind the scenes, or you can use a financial calculator to determine it if you're handy with one. You can also use a spreadsheet using the XIRR formula. Regardless, divide the PE ratio by the annualized growth rate. As an example, if the PE is 20 and the annualized growth rate is 20%, simply divide 20 by 20, resulting in a ratio of 1.0. As Justin mentioned, he likes to use the five-year growth rate. I'll take a moment to explain why I check that data very carefully before using it. First, it's hard enough to know what the rate of growth will be for the next 6 to 8 quarters, much less the next five years. Second, if you examine the implied growth rates of the nearer-term estimates, you'll see that sometimes it would be virtually impossible for the five-year growth rates to be reasonable. That's because the near-term growth rates render teh five-year growth rates ridiculously low or high. Third, sometimes very few of the analsyts making the short-term estimates are also making the five-year estimates, making those five-year numbers even more questionable. Just my personal take on the growth rates used in PEG ratios. By the way, Eric and I have had private communication about the disparate PEG ratios arrived at using the same method for Checkpoint. Our trailing earnings numbers were different, throwing off the results. I used Zacks but I haven't heard from him yet about his source. --Mike Buckley