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reddingrunner (92.33)

GARP: World According To



August 23, 2007 – Comments (0)

I'm basically a GARP investor which means that the PEG ratio is crucial to my decisions; though it isn't the only factor. Critics will say that the problem with PEG is that the G really stands, not for "Growth," but for "Guess".  A company's future growth projections are nothing but semi-educated guesses and are often wrong.

Actually, the pressure on the analysts who publish these "guesses" is intense.  They are the cream of the crop and if they don't get it right most of the time; they're toast.  Same for their experienced bosses who review and OK their guesses.  The future being what it is (uncertain); mistakes will be made.  But NOBODY buys a stock without making guesses about the future.

Some like to look at book value as the main factor in investing.  I don't get it.  For one thing asset valuation is as big a guess as you will find.  What are FedEx's trucks worth, or Walmart's inventory, or Ford's factories?  How much could they fetch on the open market and (most importantly) why would that information, if you could guess right, even matter.

Ultimately all that matters is profits, particularly the future growth of profits, and whether or not the stock's current price reflects that accurately or overstates or understates.  Granted, earnings are not the same as profits, and book value does count for something (though not as much as many think).

A company with a P/E of 80 in a sector with a historical average P/E of 20 is going to end up at 20 eventually - and you don't want to be late getting out!  A profitable company with a P/E of 20 in a sector with a historical average of 20 will, if it grows at 20% a year, see it's stock rise 20% a year...  on average.

That's my story and I'm sticking to it!

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