THE CHALLENGES OF INVESTING ARE OFTEN WON OR LOST BY USE OF A FEW SIMPLE TOOLS. STOCKjAWS’ MONEY CHOPS PRESENTS
Fun With Peg And P/E.
“Who’s P/E Again?”
THE P/E RATIO WAS NOT CARRIED DOWN FROM THE MOUNT IN TABLET FORM. BUT, THOSE WERE THE EARLY DAYS OF DISMAY AND QUEASINESS OVER AMAZON’S PRICE-TO-EARNINGS MULTIPLE. SO YOU WANT THE BEST FOR THE PRICE OF THE REST? HOW DOES THAT THINKING PERSIST?
Why bother to do your own numbers?
ONE MORE FROM VOX YET AGAIN COMPARED AMAZON’S P/E TO THE S&P 500. THE NUT WAS THAT AMAZON’S SAVAGELY OVER-PRICED. AMZN’S SHARE PRICE IS CAST LIKE THIS–IT’S SHARE PRICE WOULD HAVE TO FALL 90% TO REACH THE MARKET AVERAGE OF 24. THE IMPORT SEEMED MORE AN ATTEMPT TO BROADSIDE, RATHER THAN INFORM. WHY?
Data streams are full of mistakes. Do you really want to buy on one?
THE REPORTER NEVER BOTHERED TO MENTION THAT AMAZON IS FAR FROM AVERAGE. NO INCLUSION OF THE PEG RATIO–THE EARNINGS GROWTH RATE, THE NETWORK EFFECT, OR INDUSTRY POSITIONING. THE TOOLS BELOW WILL SAVE YOU. THEY WILL ALSO KEEP YOU FROM SAYING THINGS THAT MAKE NO SENSE.
P/E calculation. Divide current share price by annual EPS.
Divide current share price by annual EPS, not quarterly. This pair of unassuming metrics are amazing. They cut the yap and crap. Easy as pie to learn. Make them yours forever. Like cutting tools? Us too.(SJGraphic.)
IN STOCKjAW’S MONEY CHOPS WE PRESENT THE TOOLS INVESTORS NEED IN ORDER TO CORRECTLY INCORPORATE FUNDAMENTAL ANALYSIS. THE P/E RATIO IS OUR FOUNDATION VALUATION TOOL. IT’S FUN, YET INCOMPLETE. ADDING THE ADDITIONAL CALCULATION OFFERED BY THE PEG RATIO CREATES ACCURATE COMPARISONS; APPLES TO APPLES OR APPLES TO ORANGES.
Data streams are products, made by people. Mistakes are just part of it. Ever seen a P/E ratio off by a factor of 4? Ever seen a peg ratio listed as 4.5, when it was really 2.6? We have. We did the math.
WHY DO THESE SIMPLE CALCULATIONS? BECAUSE DATA STREAMS WERE NEVER PERFECT AND AREN’T PERFECT NOW. MISTAKES ARE GUARANTEED. WE’VE FOUND P/E’S OFF BY A FACTOR OF 4. WE PRESENT THE P/E AND PEG RATIOS NOW SO YOU CAN HAVE CONFIDENCE IN THE NUMBERS YOU MOVE ON. YOU HAVE NOTHING TO LOSE, UNLESS YOU SIMPLY RELY ON OTHERS TO DO YOUR WORK.
Employing the PEG ratio allows true comparisons. Smart investors pay up for fast growth. Sometimes cheap is just cheap, not value. Best example–Amazon. Avoiding AMZN based on a high P/E misses the entire point. The PEG ratio is your first step toward truth.(SJGraphic.)
A PEG RATIO OF 1 IS CONSIDERED CHEAP. 2 IS CONSIDERED AS EXPENSIVE. THE PEG RATIO ALONE DOES NOT DETERMINE VALUE OR WORTH. THE HOLISTIC USE OF BOTH DISCIPLINES, FUNDAMENTAL AND TECHNICAL ANALYSIS, IS REQUIRED TO KNOW YOUR STOCK. THESE RATIOS ARE WHERE YOU START. TOOL ON.
THE RULE OF 72.
A.K.A., HOW FAST AM I GOING TO GET RICH?
OR, WHY THE BANK SUCKS.
Compounding in action, a.k.a., what to think when the bank starts talking. The rule is more accurate with small numbers.
What we’ve learned today;
THE KING-HELL TOOL FOR COMPARING EVERYTHING TO ANYTHING.
Conversion to percentages allows head-to-head comparisons of anything. Fart velocity to the Space X Falcon Heavy–it’s all comparable in %s. It’s common for companies to mix metrics when reporting.; dollars, percentages, peanuts.
They do so intentionally, to exclude the lazy. Crap results are totted in dollars. Good results come in %s. It’s amazing really. Do they think we don’t notice? The more they mix, the less we believe. But they all do it. Step past the annoyance and convert. If a stink emerges, kick them to the curb. Here’s how.
TRUE LEADERSHIP COMES IN MANY FORMS. FORGET POLITICS. ONLY FOOLS LEAVE INSIGHT ON THE TABLE WHEN THEY WALK AWAY. KEEPING THE “RULE OF 72” IN MIND, AND RISING RATES, LET’S OFFER THE PRESIDENT A 2% CD.
Your dollars are your employees. How many are actually working? Allowing your dollars to do nothing is not your best move. You work. Put your dollars to work, around the clock. We do. So can you. We’re showing you how, everyday.
Thanks for reading.
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