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Portfolio123 » List all forums » Forum: Simulations and Portfolios » Thread: Some thoughts on PEG |
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Total posts in this thread: 3 |
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zathrus
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Hi All- I've noticed that a lot of screens here use the PEG factor as a way to determine valuation. I wanted to mention something that might be important that was learned over at the Fool MI boards. The MI system allows you choose which of the rankings you will buy on each pass of the screen. Typically, you would buy ranks 1-5 or 1-8. One thing that was noticed though, is that on PEG screens, performance actually improved if you DIDN'T buy rank 1 (which would seem to be the best candidate). Now logically that might make some sense. After all, PEG tells you how much people are paying for the stock compared to how much it should be worth. A PEG of 1 says the price matches the value, and a PEG of 2 says people are paying twice the stock is worth. So value shoppers like to find a PEG less than 1. BUT - What if you find a stock with a PEG of 0.1? What the heck does that mean? People are paying 10% of what the stock is worth???? Are people on Wall Street missing the boat so completely???? Nope - it probably means that there is something afoot. Some bit of news etc that has made the stock an outcast. Consider what happened to Enron a while ago. When the scandal hit, there was almost certainly a period in which the price had already dropped, but the data available to websites (fundamental data) had not caught up with the truth. The PEG would've been terrific, but would you want that in your portfolio? So, it seems that it might be a reasonable experiment to add a minimum PEG to a trading system. I'd be interested to see what a reasonable minimum could be. Would it be a fixed number (0.25 for instance), or a relative number?. Perhaps if you took the PEG of the industry sector, and then went 20% below that? I'd be interested in hearing what you folks think about this... Best Wishes Z |
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DennyHalwes
Advanced Member UNITED STATES Joined: Apr 28, 2004 Posts: 1532 Status: Offline |
Gary, You are correct! Very low PEG value hurts performance. I have run tests on PEG sweeping the High and Low values on every popular public Ranking System. With some Ranking Systems, using PEG at all hurts the performance. For the Ranking Systems that PEG helps performance I have found the Buy Rule, "PEG > 0.3 & Peg < 0.8" works best. If I have very many more restrictive Buy Rules I have to raise the high value to 1.0 or 1.2 to avoid leaving cash on the table. However I never buy using a value of PEG < 0.3. Denny  ---------------------------------------- "The significant problems we face cannot be solved at the same level of thinking that we were at when we created them". Albert Einstein |
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zathrus
Member
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Hi Denny - It sure is nice when real data agrees with basic logic  Thanks for the sharing your work! Gary |
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