Originally Posted by 3irty1
Incredible indicator?
Well, not from my perpective. It "can" be a good tool, but like anything else it can be abused.
Let's talk about it. My biggest issue with it is that it is a "predictor" of future events and none of those are exceptionally reliable. No one (except Jesus) can predict the future and he ain't into stocks so he doesn't weigh in.
The P/E ratio is a critical component of the calculation of the PEG. The PEG can only begin to be accurate if the P/E is accurate. Plenty of things can make it inaccurate. Some are perfectly honest, some are NOT. Just like the rest of the market (and life too).
So why can the P/E be unreliable? The P/E is determined at a given point by the market value of a company or its shares. Already built into this market price are the future expectations of a companies growth. Future growth affects share price, therefore future growth affects P/E, which affects PEG.
Next, let's look at earnings. Earnings are an accounting figure that can include non cash estimates. Earnings have to be prepared in accordance with GAAP, on the surface you might think they're all identical. But they're not. Companies have much latitude within GAAP to manipulate earnings depending on whether they have an aggressive or conservative approach to their business.
Other companies have massive underfunded pension and healthcare obligations. Guess what? Those are not reflected on their income statements and are therefore left out of the P/E ratio. That could be a major factor in the accuracy of the PEG, couldn't it? Leaving out debt would increase the P/E ratio and make the company look much more attractive than it really is....
Then there are always "one time events". For example, if you own a company that sells one of its subsidiaries for more than it's book value, this would be recorded as an increase in net earnings. This would alter the accuracy and the usability of the P/E ratio, and make PEG useless as a measure of value.
Honestly, I'm just getting started here. I haven't even really talked about a company that wanted to manipulate it's numbers. Guess how Madoff made his scheme attractive? Yep, the P/E ratio. In his case, through all kinds of markets, it stayed the same, or very similar.
I like PEG, it's a good tool. ONE tool. Free cash flow is another, and it's much harder to fake longer term.
Partial, you know enough to be dangerous. If everything falls just right, you'll make money. But if it doesn't, you'll lose your shirt, just like the Enron employees who had their retirement in stock and options.
You ridiculed me earlier for "comparing" corruption with recession. But you missed the bigger picture. To the investor, sometimes corruption can look like recession, or things other than recession. You don't know until it's too late.
I could have substituted the list I gave you to include AIG, Countrywide, GM, Chrysler, Chase, Bank of America. It wouldn't have made any difference the outcome is the SAME.
Thousands upon thousands of investors lost everything in these companies. Don't be stupid enough to be the next one. Blindly following PEG, or any other ratio for that matter, will lead you down a dark alley so fast you won't know what hit you, other than your money is now gone forever.
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