Quote Originally Posted by retailguy View Post
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?

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I agree completely, and the sad part is that as unreliable as P/E is for the reasons you gave, it is the most reliable component of PEG. The "G" part is predicted growth (either over 3 or 5 years) and historically the estimates aren't close.

A study was done by the Penn State business school covering all published estimates from Wall Street analysts over a 20 year period. Their average annual growth from their 5 year estimates was 14.9% growth. Actual growth for those companies was 9.1% That was based on a 20 year comprehensive study. They weren't much more accurate on the shorter term one year estimates. Their average annual growth from 1 year predictions was 13.8% and the actual growth was 9.8%

Their estimates miss by 50%.

PEG is like any other predictive tool, it should be used in conjunction with other factors and tools to look for consistency or inconsistency in the results. It shouldn't be relied on too heavily in and of itself.