Forum Archive Index - October 2000

["David Reid" <aspex@ix.net.nz>]

PEG:

I quote from Jim Slater who established the rules that Hemmington Scott use to create REFS.

The PEG factor is calculated using the prospective PE by estimating future growth in earnings per share. Therefore requires broker forecasts preferably 5 or more.

Even more importantly he quotes restrictions on its use:

1. PEG is designed as a measure for growth stocks and does not work for recovery, cyclicals and asset situations.

2. Works best where the earnings growth is 15-25% pa. and PEs 12-20. This is not to say that it will not work outside these limits but reliability suffersfor very high PE

3. Is calculated using normalised earnings i.e. excludes exceptionals.

4. While some publications will quote a PEG for any stock, REFS awards PEGs only hwere there has been 4 years of consequitive growth, but these years may include the next year forecasts.

5. Finally the cut off for a great investment is a PEG must be under 0.75.

6. Even the greatest companies look overpriced when the PEG reaches 3.

7. A very low PEG may be evidence of danger so consider relative strength to market and recent price variability.

 

Finally REFS is dynamic because it weights forecasts by how old they are and distributes earnings over the immediate year which may consist of part of the reported recent year and part of the current year.

 

Insofar as NZ is concerned, I would doubt that even for Telecom there would be an adequate number of forecasts available which are sufficiently current. Therefore it may be impossible to achieve the high threshhold above.

 

WHS.

WHS with a PE =24 is marginally high because its growth would need to be 30% ongoing. However other factors may be in evidence.

What is its PSR in relation to other retailers. It is probably quite low, being a discounter. A very low PSR may give an opportunity to marginally lift price points and because of the turnover, this will have a huge effect on margins. Also further volume expansion also gives a big boost. Typical PSRs for retailers can vary between 0.6 and 3, preferably at the low end.

In UK one company, Matalan which is a successful clothing discounter, as at 1 Sept 2000 had a PE of 39 and PSR of 6.4 which is huge. Its price had risen to 590 from 44 two years earlier. Just one year back the price was 209 when the respective figures were PE of 32 and PSR of 2.49. and in Sept 98 the price was 45 the PE was 12 and the PSR just 0.7 It is still rising being 640 last night. The price is currently fluctuating by up to 80 and may be unstable in the current market and at these levels. I would sell and look for more stability.