Saturday, September 24, 2011

What is stock market PEGGY Method?

PEGGY Method is to evaluate stocks base on:

PE: PE Ratio
G: Growth
G: Gearing
Y: Yield (Dividend)

Many people evaluate stocks base on just one factor. Example, some buy shares just base on low PE ratio but without knowing the dividend yield. Some buy shares because the dividend yield is high but ignoring the PE ratio or growth. Some buy shares because the company got potential to grow, not taking into consideration other factors.

In order to have a better evaluation of a company, there are many many factors that we need to consider. But we have no time and we are not expert or analyst, and we don’t know how to evaluate a stock.

PEGGY Method is easy to use because:

1)the name PEGGY is easy to remember.
2)PE Ratio, Growth, Gearing and Dividend Yield are the most easily available information.
3)these PEGGY figure are very easy to interpret or evaluate.

PE ratio – The lower the better
Growth – The higher the better
Gearing – The lower the better
Yield (dividend) – The higher the better
Why PEGGY Method if we have Analyst?

PEGGY method depends on someone else's analysis of the market situation. In that case, why need PEGGY? Maybe just follow the analyst's buy/sell call, no need to even do the PEGGY.

Analysts recommended so many counters, which one to buy? Good stocks, average stocks also recommended Buy.

Some analysts ask to SELL SIME DARBY, some ask to BUY SIME DARBY, which one to follow?
So, use PEGGY to select the better stocks.

Analysts have their own agendas, use regional PE, recommended buy even if PE ratio is sky high.
By using PEGGY, you can avoid this.

Analyst prefer large cap stock, because to cater for Fund Manager.
We are not fund manager.

How to Import PEGGY PE and Growth figure

Stock Price $1.00

Earnings per share:
Year end Dec 2009  $0.08 (Actual)
Year end Dec 2010  $0.09 (forecast)
Year end Dec 2011  $0.11 (forecast)
Year end Dec 2012  $0.125 (forecast)

Example now is July 2010. You can use 2009, or coming year end 2010 forcast earnings because actual coming year end should be quite close to forcast.
$1.00 divided by $0.09 = 11.11x
So PE ratio is 11.11x

Growth is from what earnings you have used ($0.09) up to maximum forcast you can get ($0.125 year end Dec 2012).

$0.035 for two years. So, $0.09 grow 17.9% per year, for two years to reach $0.125.


Using PEGGY method
PE- Bonus (B)
G- Increment (I)
G- Security (Job Security) (S)
Y- Salary (S)

To understand PEGGY better, I compare PEGGY with a job.

If PE now, example 7, due to increase in trading volume and more research coverage, the stock will trade at higher price and higher PE, example 10, then you receive 3 months bonus.

Growth rate of 10% means increament of 10%

Low Gearing (low borrowings) means the company is more stable, means you have better job security.

Yield (Dividend)
Dividend Yield of 3% means salary of  $3,000.00

How it works:
PE 7
Growth 12% per year next two years
Gearing high
Yield (dividend) 1.5%

Imaging you just graduated, this job pays you  $1,500.
Increament 12% per year for next two years,
with potential of bonus. But not much job security.
Want to take this job?

Undecided right? Me too.

That's why you need to find a job with high salary (high dividend yield), with potential bonus (low PE), high increament (high profit growth) and high job security (low gearing).

If some figure just average, I am also just like you, undecided. Up to you to judge whether to buy.
If all PEGGY figures are good, just take the job (just buy the shares)

How to use PEGGY Method to select stock

If you want to buy a good stock, you need to know a lot of the company info, eg industry PE, economy, profit margin, competition, industry growth, exchange rate, new project, management, cash flow, major
customer, geographical risk, etc.

Everybody is so busy, where got time or knowledge to check or how to know so much. But if you buy without knowing a bit of info, also very dangerous. So I come with PEGGY Method for stock selection.

PE, G, G, Y
PE: PE ratio, price over earning per share, the lower the better.
G: Growth of future earnings/net profit. The higher % the better.
G: Gearing. About the company's borrowings. The lower the better.
Y: Yield, dividend yield. The higher the % the better.

PE: Low
G: High
G: Low
Y: High

If remisier recommends a stock, example ABC:
You: What to buy?
Remisier: Can try ABC at $1.95. Fair value $2.40
You: PE low?
Remisier: 11.2, Average

You: How about future growth?
Remisier: 14%. Indonesian and Thailand operations just started
You: How about gearing or borrowings
Remisier: No borrowings, net cash
You: How about the dividend yield?
Remisier: Got 5%-6%, paying 60% profit as dividend.
You: Sound good, buy 2 lots at $1.95

If remisier recommends a stock, example XYZ:
You: What to buy?
Remisier: Can try XYZ at $44, good dividend
You: PE low?
Remisier: high, about 18.
You: How about future growth?
Remisier: Next few years negative or no growth
You: How about gearing or borrowings
Remisier: High borrowings
You: How about the dividend yield?
Remisier: Got 5% dividend yield or less.
You: Dividend yield 5% good, but other things are bad. Not interested

From the above, you can use PEGGY method to select stock. If you are not familiar with stock market or financial term, no need to know the exact figure or percentage. Just need to know whether is high or low. Just ask your remisier PEGGY questions. Very difficult to get all PE G G Y perfect. So, if example PE, G, G are good, but the Yield a bit low, then can be considered. No need so rigid, up to you. The above example
ABC, the PE is average but all are good, so can considered. If you can find one counter all PEGGY is good, just buy it and then let me know. I will buy.

Salary Bonus Increment in Stock Market

Using PEGGY method
PE- PE ratio is staff Bonus
G- Growth is staff increment
G- Gearing is stability or cashflow of company- Job Security
Y- Yield (dividend) is staff salary

You buy a stock, every year you receive dividend (salary). The company grow and pay higher dividend, means your employer business grow and give you increment. Low Gearing means the company is more stable, means you have better job security.

If you buy blue chips that trade at high PE (16-18), you can only depend
on Growth (increment) and Dividend (salary). They hardly trade above PE
of 18. So, you have no bonus.

But if you buy a stock with low PE, example 7, due to increase in
trading volume and more research coverage, the stock will trade at
higher price and higher PE, eg 8, 10 or 12. it is a BONUS to you.


Do you just want to receive salary and increment, or you also want to
receive BONUS?

How to get PEGGY Figure

PE: You can not take PE from newspaper. Old data. Can be used as reference to support only.

G: Growth rate of the net profit. Expected long term growth. Normally forecast 2-3 years. Nobody can really forecast with 100% accuracy and more than 3 years. Most analysts, their accuracy is about 70%. They will adjust their forecast quarterly when the result is out.

G: Gearing. For formula, people use Long Term Liabilities divided by Equity Shareholders' Funds. You can look at balance sheet to find out the figure. Old data never mind, because changes are normally
minimum Every quarter. Now quite common people use Total Loan minus out cash and cash equivalent, then divide by Equity Shareholders' Fund

Y: Yield, dividend yield. You can not take from newspaper. Old data. Can be used as reference to support only. You can also find out the dividend payout ratio policy. If 40%, means if they earn  $1.00 per share, they will pay out $0.40 dividend (refer my post on payout ratio).

PE, Growth and Yield, you need to take forecast. Historical data use as reference to support and is important to serve as track record. Gearing can take current, but preferably forecast, if available.

Conclusion: PEGGY Method rely on forecast figure. But how to get? Have to refer analysts or research report. Most brokers have their own research report available to clients. They have done all the hard work. Just take out the report and just check out the PEGGY figure, quite fast and simple.

Many people make a lot of money without using PEGGY method. They buy low and sell high, then buy low again and sell high again. But I am not good at that. So PEGGY is useful for me.

What is PEGGY Ratio Method

Rather than just rely on PE ratio, or now the trend is PEG ratio, we also need to evaluate gearing and dividend yield. I try to make things easy for you all to remember, so I come out PEGGY method to evaluate a company.


PE is PE ratio. The lower the better.
G is Growth, expected long term growth rate eg 15%. The higher the better
G is gearing, the lower the better, best is net cash
Y is yield, ie dividend yield. The higher the better

All are important. More than 10 years ago I just look at PE, which is not enough.
Now people like to use PEG, that is using PE ratio divided by growth rate. The lower the better. But also not enough. Many don't bother about gearing.
Some investor just look at Dividend Yield.

You need to consider all. So, I advise you to use my PEGGY method
Just remember PEGGY, easy right.

If your remisier ask you to buy Genting International Ltd Singapore or IOI Corp, you can start asking him, what is the PE? Then ask him what is expected growth rate? How about gearing? Is dividend yield high?
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