PEG and the Time and Discretion Elements
CSP, thank you for the post. As a value investor, I too am very interested in PEG as it is a better indication of relative present valuation than PE.
It is, however, very important to address the time element of PEG as they relate to the key calculation's input -growth rate and the underlying assumptions that go into it. PEG looks into the future and takes earnings growth rate into consideration. In doing so, it opens the door to a tremendous amount of discretion and uncertainty which can be dangerous especially for small cap stocks, which can barely get current year eps accurate notwithstanding future years. When looking at PEG (which should only be used along with other fundemental ratios) it is necessary to note the time element. For example, when Yahoo Finance reports its PEG, it uses a 5 year growth time frame to calculate. Other sources use a different time frame down to one year. Imagine the difficulty, discretion, and ultimately the accuracy of predicting 5 yr growth for the Chinese small caps we follow.
As such, and especially for small caps that lack analyst coverage and therefore "objective" earnings growth estimates, and wherein long-term future growth is very difficult to predict, we must address the PEGs time frame for calculations and accordingly the underlying assumptions for the growth estimates, specifically where they are coming from and over what period of time.
