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

To: sditto who wrote (30531)	8/26/2000 10:45:55 AM
From: drew_m	Respond to of 54805

sditto, Well stated, thank you. Drew@stillgetting"it".com

To: sditto who wrote (30531)	8/26/2000 7:57:16 PM
From: Mike Buckley	Respond to of 54805

sditto, The price/earnings growth (PEG) ratio was developed to help differentiate companies with similar P/E ratios by comparing their current price to their projected earnings growth rate. Yes, but I think or at least I hope the reason is much deeper than that. The best characteristic of a PEG ratio is that it actually serves as a "lite" version of a discounted cash flow analysis. Considering that today's price of a stock should have some resemblance to the present value of future earnings and termination value, that ain't a bad thing. --Mike Buckley P. S. Hello to everyone from Peru!

To: sditto who wrote (30531)	8/27/2000 5:55:00 PM
From: Seeker of Truth	Read Replies (2) \| Respond to of 54805

You have done many people a great favour by your post. I too was aware that the P/E to Growth ratio isn't a linear measure of value. E.g. a stock selling at 100 times earnings but growing at a 50% rate is deemed to be twice as expensive as a stock selling for 10 times earnings and growing at 10% a year. However the first will increase its earnings in 5 years by 659% whereas the "cheaper" stock will only increase its earnings by 61% in the same 5 years. Evidently the stock with the higher PE/Growth ratio was in fact cheaper. There is of course a big caveat. We don't know for sure how long the 50% will continue and we don't know for sure how long the 10% will continue. We need some further perhaps nonquantifiable facts relating to the probable future of the two companies. These are the gorilla characteristics, which we don't need to repeat here. However, suppose we are comparing two gorillas in of course two separate domains. How can we decide if GMST is cheaper or dearer than CSCO? I submit that the net profit margin, i.e. net income/revenues is a good number which may be a useful surrogate for patents/value chain/proprietary architecture etc. If we use the ratio PE/profit margin we obtain a figure which is of some interest. What do you think? This makes GMST look distinctly cheaper than CSCO. I personally hold both and am locked into CSCO by Canada's 40% tax on capital gains, so for me this is only a theoretical exercise but it is one which may prove useful for everyone, sooner or later. Almost invariably the company growing at 10% has a lower profit margin than the one growing at 50% so this is a way of numerically incorporating the bold guess that stocks with a high profit margin are more likely to maintain their growth rates. Of course this is not true for cyclic stocks. But gorillas are not cyclic.

To: sditto who wrote (30531)	8/27/2000 7:14:20 PM
From: gdichaz	Respond to of 54805

sditto: As Malcom has just said, you have done a great service here with your insight in your post on PE vs growth. What has been missing in most analyses is just the point you made. Once there was a joke which I remember well. "Why is a mouse when it spins?" Answer: "The higher, the fewer" While the "joke", such as it was, related entirely to the disconnect between the question and "answer", [sic.], the attempt to use PE as a stock evaluation tool has had a major disconnect also, and you have just made that clear. When the PE is 10 and the growth is 10, the engine is on slow. When the PE is 100 and the growth is 100, the engine is revved up. They ain't the same. Much appreciate your insight. Best. Cha2