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PEG RATIOS

PEG RATIOS. What are they?. How are they useful?. Presented by Putra Bridge & Benjamin Lunsford. Classic Investing Strategies. Growth – “I buy companies that are growing rapidly.” (high earnings growth) Value –“I buy companies that are trading at a cheap price.” (low PE Ratio)

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PEG RATIOS

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  1. PEG RATIOS What are they? How are they useful? Presented by Putra Bridge & Benjamin Lunsford

  2. Classic Investing Strategies • Growth – “I buy companies that are growing rapidly.” (high earnings growth) • Value –“I buy companies that are trading at a cheap price.” (low PE Ratio) • PEG Ratio is a ratio between a given PE Ratio and the Growth Rate • “I want the companies growing rapidly, but I don’t want to pay too much.”

  3. P/E RATIOS • Price-to-Earnings Ratio • Quotable quotes from Prof. Demong: • “In the business of investing, they project forward earnings to make their PE ratios” • “In the newspaper, they use trailing earnings for their PE ratios” • “It’s up to you to decide if a PE is too high or too low for that company”

  4. PEG RATIOS • A good way to help “decide if PE is too high or too low for that company” • PE-to-Growth Ratio • Just like earnings, one might use either trailing or forward growth rates • Can use many different time periods – know what your source was using when evaluating a PEG Ratio you see in print

  5. PEG RATIOS PE RATIO PEG RATIO = EARNINGS GROWTH (ANNUAL RATE)

  6. PEG RATIOS • Try it out! • If my company’s forward growth rate is 13% and the forward PE Ratio is 39, what is the forward PEG Ratio? • 3.0 • If my company’s forward growth rate is 24% and the forward PE Ratio is 36, what is the forward PEG Ratio? • 1.5

  7. PEG RATIOS • Which is better? • The lower, the better! The official “sweet spot” varies, you can you think of it as 0.75 to 1.50 … many successful investors aim for right around 1.0

  8. THE LOWER THE BETTER!! • For past five to ten years, it has been easier to find smaller companies with PEGs in the sweet spot. • Typically, Small caps have always had higher growth rates than larger caps. Only in the past decade have they had lower PEs as well. • What does this mean for us? In today’s market, very few large caps have decent PEGs

  9. Some Example Companies (Chosen at Random)

  10. !WARNING! • Can’t just invest by selecting lowest PEG ratios you see on screening model. • Must perform due diligence and research quality of earnings and growth rate. • If earnings and growth rate projections are legitimate, PEG ratios are a very useful tool.

  11. EXAMPLE • …of a serious PEG disciple: John Montgomery of Bridgeway Funds • His Bridgeway Aggressive Growth Fund (BRAGX) is a consistent performer • #1 out of 350 funds in Mid-Growth category for last five years

  12. QUESTIONS?

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