Wednesday, November 28, 2007
Back to Business
Last week during the Thanksgiving break, I decided to wait on the market to determine the next direction. I didn't daytrade, but rather just held onto my long positions which got crushed on Monday's selloff which closed at the Aug 16 lows to form a double bottom. I expected a big rally was due to happen and sure enough a 4% rally in the indexes in just 2 days! Is this another trap set up by the bears or are the bulls starting to take over? The general trend is still down, but the huge move up is reminiscient to the previous correction. Overall, I'm bullish going into December, but the downtrend makes me cautious. Tomorrow, I think we will continue up towards 13400 in the Dow only to reverse back down and form some higher lows on the charts. A pull back near 13000 would be very nice and I'm expecting that to happen to form a potential inverse head-and-shoulders pattern. I'll be waiting to go short as a hedge to my longs.
Thursday, November 15, 2007
PEG Calculation for STV and Price Targets
First of all, this message is meant to be universal so all investors can understand the terminology. I apologize to those that may find this information redundant.
Upon further investigation, I have a better idea on the theoretical price for STV. "Net income" is the same as total profit which is reached by multiplying revenue with the profit margin. EPS (earnings per share) is then calculated by dividing the net income by the share distribution/dilution. If the TTM (trailing twelve month) revenue was $41.6M, TTM profit margin was 52.78%, and total share count was 55.0M, then the TTM EPS is $0.40:
Revenue x profit margin / share count = EPS
41.6M x 0.5278 / 55.5M = $0.40
Here is an updated calculation after third quarter earnings and fourth quarter guidance:
Net income was 12.2 million after the first two quarters, 8.8 million for the third, and fourth quarter revenue is expected to be 15.5-17.5M so I'll use 16.5M for my figures to find the net income for the fourth quarter.
Fourth quarter revenue / third quarter revenue x third quarter net income = fourth quarter net income (assuming profit margins and share count remain unchanged)
16.5M / 14.4M x 8.8M = 10.1M
Annual net income = 12.2M + 8.8M + 10.1M = 31.1M
Current EPS = annual net income / share count
Current EPS = 31.1M / 55.5M = $0.56
Taking the closing price of $38.59 from 11/15/07, here is the PE (price to earnings ratio):
PE = price / earnings
PE = $38.59 / 0.56 = 68.9
The company expects its year-over-year growth to be in the range of 61-82% so now here is the PEG (price to earnings over growth ratio).
PEG = price / earnings / growth
1a. PEG based on 30% growth = $38.59 / 0.56 / 30% = 2.30
2b. PEG based on 40% growth = $38.59 / 0.56 / 40% = 1.72
3c. PEG based on 50% growth = $38.59 / 0.56 / 50% = 1.38
4d. PEG based on 60% growth = $38.59 / 0.56 / 60% = 1.15
5e. PEG based on 70% growth = $38.59 / 0.56 / 70% = 0.98
6f. PEG based on 80% growth = $38.59 / 0.56 / 80% = 0.86
7g. PEG based on 90% growth = $38.59 / 0.56 / 90% = 0.76
8h. PEG based on 100% growth = $38.59 / 0.56 / 100% = 0.69
Price target (52 weeks) = price x [(growth percentage / 100) + 1]
1. Price target based on 30% growth = $38.59 x 1.3 = $50.17
2. Price target based on 40% growth = $38.59 x 1.4 = $54.03
3. Price target based on 50% growth = $38.59 x 1.5 = $57.89
4. Price target based on 60% growth = $38.59 x 1.6 = $61.74
5. Price target based on 70% growth = $38.59 x 1.7 = $65.60
6. Price target based on 80% growth = $38.59 x 1.8 = $69.47
7. Price target based on 90% growth = $38.59 x 1.9 = $73.32
8. Price target based on 100% growth = $38.59 x 2.0 = $77.18
Price target (52 weeks) with PEG comparison = comparative's PEG / PEG x [(growth percentage / 100) + 1] x price
a. 30% growth vs 1.50 PEG target price = 1.50 / 2.30 x 1.3 x $38.59 = $32.72
b. 40% growth vs 1.50 PEG target price = 1.50 / 1.72 x 1.4 x $38.59 = $47.11
c. 50% growth vs 1.50 PEG target price = 1.50 / 1.38 x 1.5 x $38.59 = $62.92
d. 60% growth vs 1.50 PEG target price = 1.50 / 1.15 x 1.6 x $38.59 = $80.54
e. 70% growth vs 1.50 PEG target price = 1.50 / 0.98 x 1.7 x $38.59 = $100.41
f. 80% growth vs 1.50 PEG target price = 1.50 / 0.86 x 1.8 x $38.59 = $121.15
g. 90% growth vs 1.50 PEG target price = 1.50 / 0.76 x 1.9 x $38.59 = $144.71
h. 100% growth vs 1.50 PEG target price = 1.50 / 0.69 x 2.0 x $38.59 = $167.78
For PEG comparison of 2.0, just multiply the price targets above by 1.33. For PEG comparison of 1.0, multiply 0.67
Upon further investigation, I have a better idea on the theoretical price for STV. "Net income" is the same as total profit which is reached by multiplying revenue with the profit margin. EPS (earnings per share) is then calculated by dividing the net income by the share distribution/dilution. If the TTM (trailing twelve month) revenue was $41.6M, TTM profit margin was 52.78%, and total share count was 55.0M, then the TTM EPS is $0.40:
Revenue x profit margin / share count = EPS
41.6M x 0.5278 / 55.5M = $0.40
Here is an updated calculation after third quarter earnings and fourth quarter guidance:
Net income was 12.2 million after the first two quarters, 8.8 million for the third, and fourth quarter revenue is expected to be 15.5-17.5M so I'll use 16.5M for my figures to find the net income for the fourth quarter.
Fourth quarter revenue / third quarter revenue x third quarter net income = fourth quarter net income (assuming profit margins and share count remain unchanged)
16.5M / 14.4M x 8.8M = 10.1M
Annual net income = 12.2M + 8.8M + 10.1M = 31.1M
Current EPS = annual net income / share count
Current EPS = 31.1M / 55.5M = $0.56
Taking the closing price of $38.59 from 11/15/07, here is the PE (price to earnings ratio):
PE = price / earnings
PE = $38.59 / 0.56 = 68.9
The company expects its year-over-year growth to be in the range of 61-82% so now here is the PEG (price to earnings over growth ratio).
PEG = price / earnings / growth
1a. PEG based on 30% growth = $38.59 / 0.56 / 30% = 2.30
2b. PEG based on 40% growth = $38.59 / 0.56 / 40% = 1.72
3c. PEG based on 50% growth = $38.59 / 0.56 / 50% = 1.38
4d. PEG based on 60% growth = $38.59 / 0.56 / 60% = 1.15
5e. PEG based on 70% growth = $38.59 / 0.56 / 70% = 0.98
6f. PEG based on 80% growth = $38.59 / 0.56 / 80% = 0.86
7g. PEG based on 90% growth = $38.59 / 0.56 / 90% = 0.76
8h. PEG based on 100% growth = $38.59 / 0.56 / 100% = 0.69
Price target (52 weeks) = price x [(growth percentage / 100) + 1]
1. Price target based on 30% growth = $38.59 x 1.3 = $50.17
2. Price target based on 40% growth = $38.59 x 1.4 = $54.03
3. Price target based on 50% growth = $38.59 x 1.5 = $57.89
4. Price target based on 60% growth = $38.59 x 1.6 = $61.74
5. Price target based on 70% growth = $38.59 x 1.7 = $65.60
6. Price target based on 80% growth = $38.59 x 1.8 = $69.47
7. Price target based on 90% growth = $38.59 x 1.9 = $73.32
8. Price target based on 100% growth = $38.59 x 2.0 = $77.18
Price target (52 weeks) with PEG comparison = comparative's PEG / PEG x [(growth percentage / 100) + 1] x price
a. 30% growth vs 1.50 PEG target price = 1.50 / 2.30 x 1.3 x $38.59 = $32.72
b. 40% growth vs 1.50 PEG target price = 1.50 / 1.72 x 1.4 x $38.59 = $47.11
c. 50% growth vs 1.50 PEG target price = 1.50 / 1.38 x 1.5 x $38.59 = $62.92
d. 60% growth vs 1.50 PEG target price = 1.50 / 1.15 x 1.6 x $38.59 = $80.54
e. 70% growth vs 1.50 PEG target price = 1.50 / 0.98 x 1.7 x $38.59 = $100.41
f. 80% growth vs 1.50 PEG target price = 1.50 / 0.86 x 1.8 x $38.59 = $121.15
g. 90% growth vs 1.50 PEG target price = 1.50 / 0.76 x 1.9 x $38.59 = $144.71
h. 100% growth vs 1.50 PEG target price = 1.50 / 0.69 x 2.0 x $38.59 = $167.78
For PEG comparison of 2.0, just multiply the price targets above by 1.33. For PEG comparison of 1.0, multiply 0.67
Market is Undecided and I'm Going with My Gut
The day was excellent for both my short and long positions until the last hour when the market went sideways in huge swings. The market closed right at support which is the worst place possible for my short positions. I waited until the close for more clarity as to which way we'd go for tomorrow in terms of set up. A close below support and I would hold my shorts while a close above by a decent number and then I would sell the short positions and go long. At 2:30 we had a big selloff and then a 50% Fibonacci retracement at 3:15. Later, we had another selloff at 3:30 to form a double bottom before rallying back to the %50 retracement level at the close. I closed SKF at 95.71 for a gain of $7.83 and FXP at 78.66 for a gain of $6.38. I took off my hedge because I think there is a decent chance we rally off the double bottom with a 30% chance of a gap up. Tomorrow should be choppy as value investors are starting to come in while the panick investors finish their exit. Even though the market was down, the volume during the double bottom close was huge which is telling me we should be flat to up tomorrow. Had the volume been greater favoring the downside, I would have remained short as a test of the August lows would seem likely, although it is not of the question in the near term. I think the morning tomorrow will be positive so maybe I'll re-enter at resistance for my shorts. I'm never unsastified after locking in profits. If we gap down/selloff hard again off the open, which is a 20% chance, then I won't be too bummed out since I have already bagged my gains. The worst feeling is giving back profits.
I've been long with LDK at $40.50 and have held it through for over 50 days picking up scalps along the way. I made it a long-term play so I didn't have a stop. I was pissed when it tanked to $30 and even worse when I didn't average down when I had the opportunity. My money went into E*Trade so I can't complain too much. Yesterday's candle was very bearish closing at the day lows on an up day so I thought it might have more downside pain, but the rally for LDK today on a down day in the market is a huge reversal. I ended up doubling down at the close ($34.20)in anticipation for a gap up. The increased guidance caught a lot of shorts off guard and tomorrow they should be covering. I'm going to sell half of my position back into strength and double back on weakness. This stock is like a short position itself acting in inverse to the market. The consensus EPS is $1.34 and LDK should have a growth rate of 50% which would give it a PEG of 0.51. This one is a bargain and the inventory report should be solid in my view. Also, the price of a bad report has mostly been factored in already. Limited downside with a huge reward in the future. Being backed by the Chinese government and a new facility already being built is added confirmation that they will succeed.
Another Chinese stock I've been long is STV. I made some good scalps near the IPO date and held a core position at $40. Again, I missed an opportunity doubling down at $30, but these Chinese stocks are really speculative and I didn't want to be in for more risk. The stock has been rallying on anticipation of blowout earnings which are released today. I'm gambling by holding my shares into the call. This just in, they beat EPS expectations, but on lower revenue, and so now I hope Wall Street decides to flood more money into this stock. I will be mad to see this stock drop like other stocks after reporting earnings. The number was $0.20 which beat Reuters' consensus of $0.15. I'm going to approximate the annual EPS to be $0.90 and a growth rate of 40%. The PEG would be 1.07 and that is a conservative estimate. Although speculative, this company is predicted to be the front runner when it comes to digital TV in China and has a lot of room to grow with solid margins.
HLYS was a bust on very light volume however. I'll watch this one to see if buyers are interested. The PEG is harder to calculate since their operations have lacked transparency. They are still growing and I think earnings will turn around in the future. I'd hold off investing in this one, but it should be worth a good trade in time.
I've been long with LDK at $40.50 and have held it through for over 50 days picking up scalps along the way. I made it a long-term play so I didn't have a stop. I was pissed when it tanked to $30 and even worse when I didn't average down when I had the opportunity. My money went into E*Trade so I can't complain too much. Yesterday's candle was very bearish closing at the day lows on an up day so I thought it might have more downside pain, but the rally for LDK today on a down day in the market is a huge reversal. I ended up doubling down at the close ($34.20)in anticipation for a gap up. The increased guidance caught a lot of shorts off guard and tomorrow they should be covering. I'm going to sell half of my position back into strength and double back on weakness. This stock is like a short position itself acting in inverse to the market. The consensus EPS is $1.34 and LDK should have a growth rate of 50% which would give it a PEG of 0.51. This one is a bargain and the inventory report should be solid in my view. Also, the price of a bad report has mostly been factored in already. Limited downside with a huge reward in the future. Being backed by the Chinese government and a new facility already being built is added confirmation that they will succeed.
Another Chinese stock I've been long is STV. I made some good scalps near the IPO date and held a core position at $40. Again, I missed an opportunity doubling down at $30, but these Chinese stocks are really speculative and I didn't want to be in for more risk. The stock has been rallying on anticipation of blowout earnings which are released today. I'm gambling by holding my shares into the call. This just in, they beat EPS expectations, but on lower revenue, and so now I hope Wall Street decides to flood more money into this stock. I will be mad to see this stock drop like other stocks after reporting earnings. The number was $0.20 which beat Reuters' consensus of $0.15. I'm going to approximate the annual EPS to be $0.90 and a growth rate of 40%. The PEG would be 1.07 and that is a conservative estimate. Although speculative, this company is predicted to be the front runner when it comes to digital TV in China and has a lot of room to grow with solid margins.
HLYS was a bust on very light volume however. I'll watch this one to see if buyers are interested. The PEG is harder to calculate since their operations have lacked transparency. They are still growing and I think earnings will turn around in the future. I'd hold off investing in this one, but it should be worth a good trade in time.
Hedging My Bets
First off, I got stopped out of ETFC at $5.85 for a nice overnight trade from $5. The stock had trouble breaking $6 and volume was light until the selloff where people were locking in gains. I rebought during the day at $5.70 and got stopped out for a small loss at $5.67 while it closed at $5.54. I decided not to reinvest due to the lack of buying volume and the fact that $6 wasn't even broken besides the first tick. I think it'll retest $5 before it breaks $6.
Went long on the short ETFs SKF and FXP. Nice gap up selloff in FXI at the open which broke $190 support and became excellent resistence during the day as I expected. $186.50 offered some support until the late day selloff. There was a small bounce however at the 50 dma to close at $187.01. I'm expecting another leg lower for Thursday in the market. The financials couldn't rally past the $85 support level in SKF while the 20 dma served as a seesaw during most of the day. The $88 level held as strong support, but the volume during the selloff was lighter than I wanted. I'll have to watch the volume carefully to see if the sellers are going to take control or not in the financials.
I bought HLYS at the end of the day after they released news that they won a patent infringement case. Immediately after the news, there were a few block purchases totalling about half the volume for the day. I got in at $6.74 which was dumb of me since I forgot to trigger a limit price. I paid the market and overpaid 14-19 cents/share. I think the first level of resistence will be the 20 dma at $7.40 and then the 50 dma at $8 which coincides with a gap. My stop is at $6.50.
Went long on the short ETFs SKF and FXP. Nice gap up selloff in FXI at the open which broke $190 support and became excellent resistence during the day as I expected. $186.50 offered some support until the late day selloff. There was a small bounce however at the 50 dma to close at $187.01. I'm expecting another leg lower for Thursday in the market. The financials couldn't rally past the $85 support level in SKF while the 20 dma served as a seesaw during most of the day. The $88 level held as strong support, but the volume during the selloff was lighter than I wanted. I'll have to watch the volume carefully to see if the sellers are going to take control or not in the financials.
I bought HLYS at the end of the day after they released news that they won a patent infringement case. Immediately after the news, there were a few block purchases totalling about half the volume for the day. I got in at $6.74 which was dumb of me since I forgot to trigger a limit price. I paid the market and overpaid 14-19 cents/share. I think the first level of resistence will be the 20 dma at $7.40 and then the 50 dma at $8 which coincides with a gap. My stop is at $6.50.
Tuesday, November 13, 2007
Potential Inverse Shorts: FXP, QID, DUG, SKF, EEV
I think the first resistance level is $187-90 for the FXI or $75 for the FXP, but entering a short here would need a wide stop I think. I doubt the 50 dma will cause a bounce either way. I'm hoping for the FXI to hit the declining 20 dma near $200 and then I would short it by purchasing FXP with a tighter stop. Of course with the added volatility of a double inverse fund, the potential losses when shorting this Chinese index could be devasting even with a tight stop. I'm long in a some individual Chinese stocks as a hedge.
The QID should be worth a tight stop entry at the 50 dma or $38.35 which would preceed a gap fill left from November 8th. Otherwise I expect the 20 dma at $32 to be the next support level.
Oil & Gas has been going back and forth in both price and volume as of late. I'm kind of undecided, but one can look for a bounce for DUG at $41 as the 20 dma looks to be forming a golden cross over the 50 dma. Oil might reverse however so DUG is the most speculative short IMO.
I like shorting the Financials if we open near the 20 dma at $88.25 on SKF. A gap below and I look for $85 as support followed by the 50 dma at $82.50. Should these levels fail, then I think we would have seen a bottom in the Financials. Until then, I'd go long SKF since the subprime woes aren't completely over yet.
The emerging markets should find resistance at $160. Buy EEV near $70 with a stop at $69.50.
The QID should be worth a tight stop entry at the 50 dma or $38.35 which would preceed a gap fill left from November 8th. Otherwise I expect the 20 dma at $32 to be the next support level.
Oil & Gas has been going back and forth in both price and volume as of late. I'm kind of undecided, but one can look for a bounce for DUG at $41 as the 20 dma looks to be forming a golden cross over the 50 dma. Oil might reverse however so DUG is the most speculative short IMO.
I like shorting the Financials if we open near the 20 dma at $88.25 on SKF. A gap below and I look for $85 as support followed by the 50 dma at $82.50. Should these levels fail, then I think we would have seen a bottom in the Financials. Until then, I'd go long SKF since the subprime woes aren't completely over yet.
The emerging markets should find resistance at $160. Buy EEV near $70 with a stop at $69.50.
E*Trade
I had an awesome afternoon rally with ETFC having rode the express train from $4.05 to $4.64 before closing my intraday trading position. The day's high was $5.50 and it closed at $5.00. I took the profits and felt the rally had topped at $4.75 and would backtest $4.50, but I was wrong so I missed on another 80 cents. The "bankrupt" scare initiated by Citi Analyst Prashant Bhatia caused a 60% drop on 11/12/2007. Apparently the cash/share value is about $4.50 and the CEO was confident that they had enough money to cover a write down up to $1 billion. Also, takeover rumors swirling and strong premarket were strong. In sum, I expected a short covering bounce as the stock was oversold and the premarket gap-up signalled to me that the stock could have a very nice move in the day. I waited about 15 minutes after the open and got in at $4.05 with a stop at $3.95 which was perfect with support at $4.00. The bid sizes were incredibly huge in comparison to the ask sizes which was another indicator of a big move up. After the retracement from the day's highs, I decided to repurchase a position, albeit smaller, to hold overnight as a swing trade. I'm expecting a move to at least $5.50 and hopefully a breakout to most of the gap up to $8 which was left on Monday. Of course, another belly up comment from the financials overnight could hurt me and that's why the game is to limit risk. I'm setting my stop at $4.85 and will move it up accordingly. After hours has E*Trade at $5.24.
A lot of traders had predicted this short covering rally after 4 straight days of hard selloffs. I got caught yesterday trying to catch falling knives in JASO and TSL as both support levels at $50 were smashed without much of a battle. I also tried a bounce play at their moving averages, but their were no bulls in sight. Typically the 200 dma is strong support/resistance. Too bad it didn't hold true in these stocks. I got frustrated and was trading a bit emotionally at the close expecting a rally into the close, but the opposite happened and I lost even more.
A lot of traders had predicted this short covering rally after 4 straight days of hard selloffs. I got caught yesterday trying to catch falling knives in JASO and TSL as both support levels at $50 were smashed without much of a battle. I also tried a bounce play at their moving averages, but their were no bulls in sight. Typically the 200 dma is strong support/resistance. Too bad it didn't hold true in these stocks. I got frustrated and was trading a bit emotionally at the close expecting a rally into the close, but the opposite happened and I lost even more.
Monday, November 12, 2007
Shorting Oil & Gas
The ongoing subprime mortgage woes and credit crunch has thrown some substantial hits to the market. All types of stocks have come down considerably including the hot momentum ones like gold, technology, solar, etc. People are selling off to lock in profits after a nice recovery from the August correction. I also took profits by selling some of my holdings on the first day of this ongoing correction which stands at 3 days. The QQQ was overbought, but until it showed weakness, I maintained a hold position because it had yet to breakdown from its rising channel. Eventually it started to flatten out and roll over which was a signal to take profits in case the market goes down on a potential reversal. A lot of good stocks were getting crushed on earnings, even the ones who exceeded expectations. I decided to leverage my portfolio as well by shorting the QQQ and DIG. The every so hot stocks such as GOOG, RIMM, AAPL, BIDU were getting ahead of themselves both on a fundamental and technical level. Their PEG ratios exceeded 2.0 with the exception of Google and the charts were going parabolic. When they break down, they often fall down hard. I bought the QID (inverse of QQQ) at $37.20 expecting to break the 50 dma which it did and then exited the position at $40.30 when my stop got triggered. It was oversold so I didn't re-enter the position and I also thought it would retest the 50 dma. The risk/reward was not in my favor to continue. However, crude oil has had an incredible run also and is the only thing that hasn't come down yet. I got in early by purchasing DUG at $39.84 and I still am holding it as a swing trade. $43 is my target to complete an inverse head and shoulders pattern. I am watching JASO as a bounce play near $50 for today or tomorrow as I expect it will touch soon.
Sunday, November 11, 2007
How the PEG Ratio Works
The PEG ratio is an indicator for determining the potential value of a stock while taking into account its price relative to its earnings growth.
PEG = Price / EPS (earnings per share) / Growth Rate
ex. $19.91 / $0.70 / 15.0% = 1.89 PEG for EMC
The lower the PEG, the more undervalued a stock is. The higher the PEG, the more overvalued the stock. Convention says a security with a PEG < 1.0 is cheap while a PEG > 2.0 is expensive. The value of 1.0 is believed to be fair value, but it can be adjusted when comparing a stock to its industry. A low PEG expresses the lack of demand for a stock which can be explained for several reasons. A stock with a high PEG is generally beating market expectations to deserve a price premium. Be aware that these numbers do not project all aspects of a security like cash flow, balance sheet, etc.
PEG for Industry / PEG for Stock x Current Price of Stock = Theoretical Price of Stock Compared to Industry
ex1. $33.35 / $5.04 / 16.9% = 0.39 PEG for WCG
Industry PEG = 1.37
Sector PEG = 1.62
Market PEG = 1.44
1.37 / 0.39 x $33.35 = $117.15 for WCG
Wellcare Health Plans Inc. appears to incredibly cheap since it is trading at a huge discount to its industry, sector, and the market. This security should be worth about 3.51 times its current value if it were to equal its industry. However if you put it under the microscope, you will find out that the price has plummeted due to an FBI raid on 10/25/2007. The allegations of fraud, lack of transparency, and sentiments of fear has marked down the share price and for good reason. An investor of this security would have to consider the risk/reward. If convicted of fraud, then the stock could go to $0. If Wellcare is innocent of any wrongdoing, then the share price should go back to previous levels in time. Always do your homework and perform background checks on your investments.
ex2. $206.85 / $1.35 / 50% = 3.06 PEG for FSLR
Industry PEG = 1.49
Sector PEG = 1.49
Market PEG = 1.44
1.49 / 3.06 x $206.85 = $100.72 for FSLR
First Solar Inc. looks to be extremely expensive when paying about double for its growth. Perhaps the analysts have it wrong when predicting a 50% growth rate as the market may be suggesting a 100% growth rate. In any case, the stock is overpriced on a valuation basis and appears to be inflated by speculators. On a technical level, FSLR has become parabolic and is due for a correction to find support. Unless earnings catch up, the share price should go sideways or fall to meet up with "fair value."
In my opinion, both WCG and FSLR are bad investments. Although Wellcare Health Plans is uber cheap, the allegations of fraud from the FBI are overwhelming and it is not worth the risk to buy. On the other hand, First Solar is too expensive at current prices and would not be worth purchasing until it pulls back. However, its high growth rate and strong performance makes it a much better investment over WCG since the downside is more limited while the upside can be incredible.
PEG = Price / EPS (earnings per share) / Growth Rate
ex. $19.91 / $0.70 / 15.0% = 1.89 PEG for EMC
The lower the PEG, the more undervalued a stock is. The higher the PEG, the more overvalued the stock. Convention says a security with a PEG < 1.0 is cheap while a PEG > 2.0 is expensive. The value of 1.0 is believed to be fair value, but it can be adjusted when comparing a stock to its industry. A low PEG expresses the lack of demand for a stock which can be explained for several reasons. A stock with a high PEG is generally beating market expectations to deserve a price premium. Be aware that these numbers do not project all aspects of a security like cash flow, balance sheet, etc.
PEG for Industry / PEG for Stock x Current Price of Stock = Theoretical Price of Stock Compared to Industry
ex1. $33.35 / $5.04 / 16.9% = 0.39 PEG for WCG
Industry PEG = 1.37
Sector PEG = 1.62
Market PEG = 1.44
1.37 / 0.39 x $33.35 = $117.15 for WCG
Wellcare Health Plans Inc. appears to incredibly cheap since it is trading at a huge discount to its industry, sector, and the market. This security should be worth about 3.51 times its current value if it were to equal its industry. However if you put it under the microscope, you will find out that the price has plummeted due to an FBI raid on 10/25/2007. The allegations of fraud, lack of transparency, and sentiments of fear has marked down the share price and for good reason. An investor of this security would have to consider the risk/reward. If convicted of fraud, then the stock could go to $0. If Wellcare is innocent of any wrongdoing, then the share price should go back to previous levels in time. Always do your homework and perform background checks on your investments.
ex2. $206.85 / $1.35 / 50% = 3.06 PEG for FSLR
Industry PEG = 1.49
Sector PEG = 1.49
Market PEG = 1.44
1.49 / 3.06 x $206.85 = $100.72 for FSLR
First Solar Inc. looks to be extremely expensive when paying about double for its growth. Perhaps the analysts have it wrong when predicting a 50% growth rate as the market may be suggesting a 100% growth rate. In any case, the stock is overpriced on a valuation basis and appears to be inflated by speculators. On a technical level, FSLR has become parabolic and is due for a correction to find support. Unless earnings catch up, the share price should go sideways or fall to meet up with "fair value."
In my opinion, both WCG and FSLR are bad investments. Although Wellcare Health Plans is uber cheap, the allegations of fraud from the FBI are overwhelming and it is not worth the risk to buy. On the other hand, First Solar is too expensive at current prices and would not be worth purchasing until it pulls back. However, its high growth rate and strong performance makes it a much better investment over WCG since the downside is more limited while the upside can be incredible.
Remembrance Day / Veteran's Day
I wish to pay tribute to all the soldiers who fought and sacrificed their lives during the wars to protect the interest of their families and countries. May they rest in peace.
Welcome to PEG Investing!
This blog is for all those who are interested in all aspects of investing. We hope to build a friendly community of investors, to share opinions, advice, and to ultimately achieve success together. We will look at both fundamental and technical aspects of stocks to gain a market edge. We wish to explore the strategies, psychology, and philosophy in order to succeed at this game. Everyone is invited and encouraged to share their thoughts no matter how old, educated, or rich. Let's help each other to meet our financial goals.
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