A new statistic – The 1YPEG
Normally a PEG ratio is the PE ratio divided by the estimated average earnings growth rate for the next five years (lower is better, of course) . But that’s a total guess! No one knows what a company’s average earnings growth rate will be for five years.
I think a more useful ratio would be a One Year PEG looking backward. In other words, the one year trailing PE divided by the one year trailing earnings growth rate. It has the disadvantage or flaw that you are looking backward, but at least you are using a real number, NOT A GUESS. Who would have dreamed at the end of 2012 that ELLI would have an essentially zero earnings growth rate over the next two years? Or that SKX would have 1500% earnings growth in the next two years? I guarantee you, no one! A five year estimate is nonsense.
Here are some examples. (A growth rate the same as the PE gives a PEG of 1.0. A faster growth rate gives a lower PEG. A slower growth rate gives a higher PEG).
AMBA has a current PE of 37.8 divided by earnings growth last year of 80%, so its 1YPEG is 37.8/80 = .47
BOFI has a PE of 21.2 divided by an earnings growth of 39% so its 1YPEG is .54
EPAM has a PE of 30.5 divided by an earnings growth of 34% so its 1YPEG is .90
SWKS has a PE of 25.1 divided by an earnings growth of 64% so its 1YPEG is .39
FB has a PE of 47.8 divided by an earnings growth of 94% so its 1YPEG is .51
MIDD has a PE of 30.9 divided by an earnings growth of 24.5% so its 1YPEG is 1.26
SKX has a PE of 24.4 and earnings growth of 158% so a 1YPEG of .15
UA has a PE of 88.6 and earnings growth of 27% so a 1YPEG of 3.28 (huge).
This is important because you can see that for every dollar invested SKX gave 21 times as much growth of earnings as UA (3.28/0.15). (Or you can think of it as 6 times the earnings growth times 3.6 times smaller PE (dollars paid per earnings dollar) gives 21 times more growth per dollar invested).