PEG RATIOSPEG RATIOS

What are they?What are they?

How are they useful?How are they useful?

Presented byPutra Bridge & Benjamin Lunsford

Classic Investing StrategiesClassic Investing Strategies

►Growth – “I buy companies that are Growth – “I buy companies that are growing rapidly.” (high earnings growth)growing rapidly.” (high earnings growth)

►Value –“I buy companies that are trading Value –“I buy companies that are trading at a cheap price.” (low PE Ratio)at a cheap price.” (low PE Ratio)

►PEG Ratio is a ratio between a given PE PEG Ratio is a ratio between a given PE Ratio and the Growth RateRatio and the Growth Rate

► “ “I want the companies growing rapidly, I want the companies growing rapidly, but I don’t want to pay too much.”but I don’t want to pay too much.”

P/E RATIOSP/E RATIOS

Price-to-Earnings RatioPrice-to-Earnings Ratio

Quotable quotes from Prof. Demong:Quotable quotes from Prof. Demong:

““In the business of investing, they project In the business of investing, they project forward earnings to make their PE ratios”forward earnings to make their PE ratios”

““In the newspaper, they use trailing In the newspaper, they use trailing earnings for their PE ratios”earnings for their PE ratios”

““It’s up to you to decide if a PE is too high It’s up to you to decide if a PE is too high or too low for that company”or too low for that company”

PEG RATIOSPEG RATIOS

A good way to help “decide if PE is too A good way to help “decide if PE is too high or too low for that company”high or too low for that company”

PE-to-Growth RatioPE-to-Growth Ratio Just like earnings, one might use Just like earnings, one might use

either trailing or forward growth rateseither trailing or forward growth rates Can use many different time periods – Can use many different time periods –

know what your source was using know what your source was using when evaluating a PEG Ratio you see when evaluating a PEG Ratio you see in printin print

PEG RATIOSPEG RATIOS

PEG RATIO =PE RATIO

EARNINGS GROWTH (ANNUAL RATE)

PEG RATIOSPEG RATIOS Try it out!Try it out! If my company’s forward growth rate If my company’s forward growth rate

is 13% and the forward PE Ratio is is 13% and the forward PE Ratio is 39, what is the forward PEG Ratio? 39, what is the forward PEG Ratio?

3.03.0 If my company’s forward growth rate If my company’s forward growth rate

is 24% and the forward PE Ratio is is 24% and the forward PE Ratio is 36, what is the forward PEG Ratio? 36, what is the forward PEG Ratio?

1.51.5

PEG RATIOSPEG RATIOS

Which is better?Which is better?

The lower, the better! The The lower, the better! The official “sweet spot” varies, you official “sweet spot” varies, you can you think of it as 0.75 to can you think of it as 0.75 to 1.50 … many successful 1.50 … many successful investors aim for right around investors aim for right around 1.01.0

THE LOWER THE BETTER!!THE LOWER THE BETTER!!

For past five to ten years, it has been easier to For past five to ten years, it has been easier to find smaller companies with PEGs in the sweet find smaller companies with PEGs in the sweet spot.spot.

Typically, Small caps have always had higher Typically, Small caps have always had higher growth rates than larger caps. Only in the growth rates than larger caps. Only in the past decade have they had lower PEs as well.past decade have they had lower PEs as well.

What does this mean for us? In today’s What does this mean for us? In today’s market, very few large caps have decent PEGsmarket, very few large caps have decent PEGs

Some Example CompaniesSome Example Companies

Large Caps P/E Growth PEG

Coca-Cola 23 11% 2.1

Kellogg 18 9% 2.0

Microsoft 26 12% 2.2

Small Caps P/E Growth PEG

Aeropostale 20 23% 0.9

Carmax 30 22% 1.4

PetSmart 26 20% 1.3

(Chosen at Random)(Chosen at Random)

!WARNING!!WARNING!

Can’t just invest by selecting lowest Can’t just invest by selecting lowest PEG ratios you see on screening PEG ratios you see on screening model.model.

Must perform due diligence and Must perform due diligence and research quality of earnings and research quality of earnings and growth rate.growth rate.

If earnings and growth rate If earnings and growth rate projections are legitimate, PEG ratios projections are legitimate, PEG ratios are a very useful tool.are a very useful tool.

EXAMPLEEXAMPLE

……of a serious PEG disciple: John of a serious PEG disciple: John Montgomery of Bridgeway FundsMontgomery of Bridgeway Funds

His Bridgeway Aggressive Growth His Bridgeway Aggressive Growth Fund (BRAGX) is a consistent Fund (BRAGX) is a consistent performerperformer

#1 out of 350 funds in Mid-Growth #1 out of 350 funds in Mid-Growth category for last five years category for last five years

QUESTIONS?QUESTIONS?