A caution on low 1YPEG’s with high PE’s
As we’ve been learning about the use of the 1YPEG, it’s become clear that even a low 1YPEG doesn’t adequately protect you from a ridiculously high PE. The low 1YPEG just means that earnings are growing even faster than the high PE, but that can’t be maintained for long, and when the growth rate comes down, the stock price and PE have a long way to fall.
Just sayin…
Saul
That is exactly the point I was trying to make way, way back up the board. The p/e doesn’t even have to be ridiculous. Say a p/e of 30 with a 60% growth (and, say, decelerating growth?). It isn’t even actual growth reduction. Even fear of growth reduction is enough. AMBA, SKX, SWKS,… This is what has happened since about June. O.k. if you were in these for a year or more but building a position during the spring turned out pretty bad (so far). I think the method here is good. But, a little TMF1000 of building the position and certainly not adding at worse value points. Thanks for the caution,
KC
A caution on low 1YPEG’s with high PE’s
Yes, I certainly prefer low PE with higher PEG < 1 than higher PE but lower PEG.
Also would prefer companies with wider moat and simple to understand than companies with weaker moat and kind of harder to understand.
For me SKX is much more appealing than INF or even SWKS for these exect reasons.
Yes, I certainly prefer low PE with higher PEG < 1 than higher PE but lower PEG.
But Shukisasson, a low PE with a higher PEG isn’t great either, as it means, by definition, that the price is low in relations to the earnings, but the rate of growth of earnings is even lower. (That’s what a PEG over 1.0 means).
Saul
But Shukisasson, a low PE with a higher PEG isn’t great either, as it means, by definition, that the price is low in relations to the earnings, but the rate of growth of earnings is even lower. (That’s what a PEG over 1.0 means).
I still require 1YPEG < 1.
So let me phrase it again:
Given two companies that both pass our tests (wide moat, raising revenue etc…) with 1YPEG < 1.
The company with a lower PE will be safer for me…
However no quantitative measures like wider moat or simple to understand business may take precedence.
This is why investing is an art…
Personally, I don’t worry about the distinction with low 1YPEG’s with high PE’s as long as I am using low 1YPEG’s as merely an initial starting point for further review. In that case, the PE and growth rate, etc., are the elements of a more detailed review that factors in many risk factors, which hopefully are focused mostly on fundamentals. The risk of high PEs in this context is mostly a matter of short-term pricing risk.
[Side note: although options are not a part of this board’s focus, I personally use options instead of shares for most of my trades, and I adjust the type of trade that I make as a function of short-term pricing risk, but the decision of including or excluding a position from my portfolio is driven primarily based on the fundamentals.]
as always, i am full of carp