Replies to post #21230 on China Growth Stocks

[solarity]

Excellent post CSP. You run a top shelf operation on ECSC.

[KurtNYC]

CSP - thanks for PEG and more!

Thanks so much for this real life example, it gets right to the issue, and it's always nice to be even more convinced about something you already own! As one of the many 'lurkers' I really appreciate your generosity in explaing this. I never posted before so as to not to clog up the board unless I had something to add of value, but I just wanted to say thanks on this first day of 2010.

I can't yet offer up a great pick, but for any others looking to learn these 10 minute video's by a former hedge fund guy are great and free. I heard about him through NPR. The second set on Finance might be interesting to some of the more seasoned folks.

I look forward to learning from all of you in 2010, the traders, holders, and momentum players. In order to getting our retirement in fighting shape, which is no small task for an artist couple!

best in 2010 to the whole board

- Kurt


Valuation and Investing - the basics
http://www.youtube.com/user/khanacademy#p/c/370CD04C45C6BB81

Finance
http://www.youtube.com/user/khanacademy#grid/user/9ECA8AEB409B3E4F

Collateralized Debt Obligation (CDO)
http://www.youtube.com/user/khanacademy#p/c/9ECA8AEB409B3E4F/28/XjoJ9UF2hqg

[thedivot]

PEG ratio
Nice post CSP and a good idea to explain concepts occasionally. In fact, some use the forward P/E along with the forward growth to calculate the PEG which usually makes the ratio even lower.

[justin s]

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.

[RyanW439]

In your example of NFEC, it's PEG is kind of misleading with a company that is expected to have 100% growth yoy. Unless they're expected to continue 100% yoy growth in the future...you have a PEG of .12, so if a PEG of 1 is ultimately a well valued company, this should be trading at close to 8x current share price. However, they have a PE of 12, and if next years growth goes to something more like 25%, then you have a stock trading at a PE of 50 (after the 100% growth) and now growing at 25%, so the PEG is suddenly 2 as growth slows.

I think PEG should be calculated based of a longer term growth rate instead of one year, which could be just an anomaly due to an acquisition, new product, etc. If NFEC is expected to continue growing 100% yoy, then this is absolutely correct. However, if it's not a sustainable growth rate then you have to take that into consideration and not expect it to achieve a PEG of 1.. Obviously, it's difficult to know what these companies are going to do 2 and 3 years out, but based on past growth rates you can estimate reasonable growth expectations for the future..

Note, i have no knowledge of NFEC and have no idea what its expected future growth rate is. Just when you see 100% yoy growth, it's typically not sustainable for multiple years even in our Chinese small caps. Thought I'd throw that out..eat me alive if you want. ;-)

[twelvebuttons]

once again,you say use fundies and peg for buy and hold stocks and use ta for max returns- on average how long do you "hold" stocks under your buy and hold strategy? Many say that B and H is dead...this market punishes the holders by way of the shorts...many have sworn off holding anything thru earnings...thanks..12buttons