# YPEG Questions

I’m sorry I don’t know the answers to these, but I want to ask to make sure I’m understanding things here.

OK, so looking at the great research posted by Kevin, I am starting to wonder about some of my stock holdings.

1. Would you consider selling high YPEG price stocks in your port? In summary, a high YPEG means the stock is possibly overvalued, is that correct? For example, one of my stocks has a 5 YPEG. (insert ominous music here). One of my stocks has a 25 YPEG. What the what?

2. What does the parity price mean? I can read, it says this is what the price would be if the YPEG were 1. But how should I interpret this?

3. A negative YPEG means the company has not grown earnings year over year. Is that right?

I think that Saul keeps to stocks with a YPEG under 1 or prefers those.

Thanks for any clarifications!!
Karen

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What does the parity price mean? I can read, it says this is what the price would be if the YPEG were 1. But how should I interpret this?

Karen,
You can’t take 1YPEG as a stand alone metric to evaluate your stocks.

A 5 YPEG and a 25 1YPEG seems to be really high but it would be helpful if you gave out the tickers and if you have the adjusted EPS that would be even better. If you have stocks with a 5 and 25 1YPEG they are either growing slowly or they are very expensive but before selling anything you need to understand the business. SO give us the Tickers so we can look them over.

Thanks,
Andy

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Karen, I believe the following answers are correct but hopefully someone more qualified comes along to verify this:

1. This is only a question you can answer. Saul targets stocks with low (under one) YPEGs though. I have started mimicking this practice but still have some dividend growth stocks that are between 1 and 2 (and one with a negative YPEG). But, again, this is something you need to decide.

2. Using the YPEG as Saul uses it, a YPEG equal to 1 would basically mean the stock is currently fairly priced/valued or that it’s growth is roughly commensurate to it’s P/E. Or that the stock’s EPS growth justifies the company’s current P/E. In my head this makes sense, but I hope I’m communicating this clearly.

3. Yes. A negative EPS means the company’s earnings have shrunk YOY or that the company has a negative P/E (it’s not making a profit).

Yes, Saul prefers stocks with YPEGs under 1 but remember he stresses this is just one metric by which to judge a company and that others are just as valuable. For instance, Saul holds XPO which has a negative YPEG. I hope this helps. Again, I believe these answers are all correct but I am still new to all of this too.

• Matt

1. Would you consider selling high YPEG price stocks in your port? In summary, a high YPEG means the stock is possibly overvalued, is that correct? For example, one of my stocks has a 5 YPEG. (insert ominous music here). One of my stocks has a 25 YPEG. What the what?

Hi Karen, Always remembering that the 1YPEG is just one indicator among many, yes I would consider selling or reducing high 1YPEG stocks in my portfolio, because their PE is higher than their rate of growth. Basically that means their stock price is high relative to their rate of growth. Once the numbers get over 2.0 I just think of it as a high 1YPEG. You can get a 1YPEG of 25 with a very low rate of growth, like 1%, with a PE of 25, or 2% with a PE of 50. In general I wouldn’t be in a stock with a rate of growth of 2%, but the 1YPEG of 25 just tells you that. If it had a rate of growth of 5% and a PE of 50 and the 1YPEG was only 10 I wouldn’t be in it either, which is why I say, don’t get too excited about the number. It just says the stock is at a very high price for its rate of growth.

What does the parity price mean? I can read, it says this is what the price would be if the YPEG were 1. But how should I interpret this?

A PE of 20 and rate of growth of 20 is generally considered a fair price, but you have to take all the rest of your information about the company into account.

A negative YPEG means the company has not grown earnings year over year. Is that right?

If the company has falling earnings or losses the 1YPEG isn’t an appropriate metric. But in most cases you shouldn’t be in the company anyway.

I think that Saul keeps to stocks with a YPEG under 1 or prefers those.

Of course I prefer stocks where the rate of growth is higher than the PE. It’s not rocket science, just common sense. But then you have to read about the company and see if it’s one you would be interested in, whether there are special circumstances which would make it less interesting, etc.

Hope this helps.

Saul

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Hi Andy,

Here are some of the stocks I am considering replacing in my port, if I take 1YPEG as a large measure, and because I am not extremely focused on the businesses (but they are Fool followed stocks):

Broadridge, BR has a 1YPEG of 25

Broadridge has recently made an acquisition. My position in BR is up 23% (not including dividend) in the last 9 months. It also has a 2.1% dividend. This stock is 4.5% of port. It has a 1% YOY EPSG on Kevin’s chart.

TD Ameritrade, AMTD has a 1YPEG of 5

TD Ameritrade has a 1.6% dividend yield. I put in a sell order for it last night. Perhaps I am getting too impatient. It is a positive stock and has returned 11% (not including dividend) for my port in about 9 months. It was 2% of my port. It has a 5% YOY EPSG (did I get that right? ) on Kevin’s awesome spreadsheet.

Papa John’s, PZZA has a 1YPEG of 2.04

Papa John’s has been growing – It has returned 70% in 18 months in my portfolio. It is 2.8% of my port. Its EPS growth on Kevin’s chart is 19%. It pays an 0.8% dividend. This company seems to keep growing.

So these are the companies I own that I flagged after reviewing 1YPEG.

I like CNI, Canadian National Railway, and have owned it in the past, It has a YOYEPSG of 20% and a .87 1YPEG and it has a 1.7% dividend. I wonder if this company’s YPEG is right on though – it has a very good year last year, I think, but the rails and transports certainly have ups and downs. Hey Saul, what do you think of that one compared to your WAB?? Curious.

Any thoughts or comments are appreciated, thanks!!

Karen

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Good stuff Saul!

Can I nominate this for inclusion in the FAQ if it’s not already in there?

Of course I prefer stocks where the rate of growth is higher than the PE. It’s not rocket science, just common sense. But then you have to read about the company and see if it’s one you would be interested in, whether there are special circumstances which would make it less interesting, etc.

Karen

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Would you consider selling high YPEG price stocks in your port?

For me, PE and PEG value the stock, not the business. They suggest whether the current stock price is reasonable in relation to earnings. But they don’t tell me what the business itself is worth. If all I was interested in was a one-night stand with a stock – flipping it to a greater fool six months to a year from now – then PE and PEG might be all I need. So yes, in that case I’d consider selling stocks with high PEG.

However, if I’m interested in a longer-term relationship with a business – which I am – then I want to value the business itself. I don’t use PE or PEG to do that. Instead, I want to know how much love (cash flow) the business is going to give me, and when. To get at that, I look at value drivers such as return on investment, cost of financing, profitability, asset turnover, brand, management effectiveness, and so on.

Given this longer-term perspective, PE and PEG play two useful roles: 1) I can use them at the beginning of analysis to screen for businesses for further investigation; 2) I can use them at the end of an analysis – once I’ve gotten a sense for the value of the business itself – to test the reasonableness of the stock price in relation to that value.

Bottom line: the use of PE and PEG depend on your investing goals, strategy, and style.

Ears

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