PEG RATIOS

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PEG RATIOS
What are they?
How are they useful?
Presented by Putra Bridge Benjamin Lunsford
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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
  dont want to pay too much.

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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
• Its up to you to decide if a PE is too high or
  too low for that company

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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

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PEG RATIOS
PE RATIO
PEG RATIO
EARNINGS GROWTH (ANNUAL RATE)
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PEG RATIOS

• Try it out!
• If my companys forward growth rate is 13 and
  the forward PE Ratio is 39, what is the forward
  PEG Ratio?
• 3.0
• If my companys forward growth rate is 24 and
  the forward PE Ratio is 36, what is the forward
  PEG Ratio?
• 1.5

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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

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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 todays market,
  very few large caps have decent PEGs

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Some Example Companies
(Chosen at Random)
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!WARNING!

• Cant 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.

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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

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QUESTIONS?