How to compare companies from different sectors using the PEGividends Ratio!

When comparing among stocks of companies from different sectors, does a low P/E ratio mean the stock is a better investment? Financial literature such as CFA states that a high P/E ratio suggests a growth stock and a low P/E suggest a value stock. So what now? Growth sounds good. Value sounds good too? We are confused!

Actually, its simple. The answer lies in whether the company or sector is really growing when we deem it a growth stock that justifies a high P/E. Therefore a measure called PEG ratio emerges which takes into account the growth factor. ( [Price/earnings] divided by Estimated Growth per share). The lower the PEG ratio, the better.

Now, what if a company has a low PEG ratio and a low dividend yield, while another company has a high PEG ratio and a high dividend yield. Which is a better investment now? Confused? Enter the pegividend ratio which takes into account the dividend yield too.

PEGIVIDEND RATIO =
([Price/earnings] divided by [Estimated Growth per share + dividend yield]).

The beauty of the pegividend ratio is that it can be used to compare companies from different industries/sectors unlike when using the P/E ratio which is commonly used to only compare companies from the same sector such as TADA..the telecoms industry:

Let's put this into practice, shall we? Let us compare Singapore Airlines with Keppel Corp. Here we go!

Data For Singapore Airlines ( A Great Way to Fly!)Above

Data for Keppel Corp ( Remember Christopher Lee as the iceman in the channel 8 show!) above

PEGividends ratio for SIA = 6.86 divided by (29.05 + 14.91) = 0.156

PEGividends ratio for Keppel = 6.10 divided by (29.73+6.88) = 0.167

SIA wins! ( marginally though. Also the dividends yield we use here is for the recent year, according to reuters. It may be more prudent to take the average dividend yield among several years, such as {( year 1 dividends + year 2 dividends + year 3 dividends) divided by 3 years} divided by the current price of the share so as to smooth out the lumpiness of the dividends.)

The PEGividend ratio method is from Ryan Barnes who has worked with Merrill Lynch, Charles Schwab, Morgan Stanley and many others as an institutional trader. You can check out his site at http://epiphanyinvesting.com/.

Important: The objective of the articles in this blog is to set you thinking about the company before you invest your hard-earned money. Do not invest solely based on this article. Unlike House or Instituitional Analysts who have to maintain relations with corporations due to investment banking relations, generating commissions,e.t.c, SGDividends say things as it is, factually. Unlike Analyst who have to be "uptight" and "cheem", we make it simplified and cheapskate. -The Vigilante Investor, SGDividends Team

Singapore stocks are just cheaper but they are still not cheap. Here’s why..

We had a heated argument with The sexy Victoria Junior College student today because she hurt our ego.She said that after looking at our portfolio of stocks, she thinks it sucks. We, erhem, naturally felt insulted. We explained we bought most of it during the month of October. She countered with saying :” I don’t give a fiddler’s fart when you buy it. Everything has a value.” We, to prevent a further bruised ego, retorted by saying: “ Hey, you little lim kum put of a little girl, who has been monitoring the stock market while you are studying for your A levels. Just look how much prices have corrected! You little prick.” She shouted:” You are just like a cow and anchoring yourself to last years prices!” . With that, she left in a huff! Our egos now badly bruised. We thought we felt a tear on our cheek. And then we realized, we are cows. She is right.

In behaviourial finance, one of the fallacies of investors is to suffer from an anchoring effect. The concept of anchoring draws on the tendency to attach or "anchor" our thoughts to a reference point - even though it may have no logical relevance to the decision at hand. For example, some investors invest in the stocks of companies that have fallen considerably in a very short amount of time. In this case, the investor is anchoring on a recent "high" that the stock has achieved and consequently believes that the drop in price provides an opportunity to buy the stock at a discount. See below of an experiment. Taken from a University Research paper:

Quote
In a 1974 paper entitled "Judgment Under Uncertainty: Heuristics And Biases", Kahneman and Tversky conducted a study in which a wheel containing the numbers 1 though 100 was spun. Then, subjects were asked whether the percentage of U.N. membership accounted for by African countries was higher or lower than the number on the wheel. Afterward, the subjects were asked to give an actual estimate. Tversky and Kahneman found that the seemingly random anchoring value of the number on which the wheel landed had a pronounced effect on the answer that the subjects gave. For example, when the wheel landed on 10, the average estimate given by the subjects was 25%, whereas when the wheel landed on 60, the average estimate was 45%. As you can see, the random number had an anchoring effect on the subjects' responses, pulling their estimates closer to the number they were just shown - even though the number had absolutely no correlation at all to the question. UnQuote

In order to best avoid the anchoring effect, one has to use a calculator and determine a value. We decided to use Benjamin Graham's formula to determine that value. This value will then serve as a benchmark from which we anchor our investing decisions. We apologised to The SEXY Victoria Junior College student and bought her a Macdonalds Happy Meal with a Madagascar Giraffe ( Moooov it). She also made us sing the Victorian Anthem and she said we have to put the Victorian badge on our site. ( Whats with her and Victoria???????!!!) She was so happy that she volunteered to help us crunch some numbers. This is shown below. So you see my friend, stocks are just cheaper. They are still not cheap! ( We are not saying the market has not seen the lowest yet. Don't mistake us cos we don't know. We are just saying cheapness based on Benjamin's valuation. See our post on How to Value Equities using Benjamin Graham's Simple Formula.)

(We want to add that above is not our portfolio. We have positions in some of them though. So pls pls use a calculator, go to reuters or bloomberg and deduce the value for yourself. A the VJC student said " Don't be a Cow". )

Important: The objective of the articles in this blog is to set you thinking about the company before you invest your hard-earned money. Do not invest solely based on this article. Unlike House or Instituitional Analysts who have to maintain relations with corporations due to investment banking relations, generating commissions,e.t.c, SGDividends say things as it is, factually. Unlike Analyst who have to be "uptight" and "cheem", we make it simplified and cheapskate. -The Vigilante Investor, SGDividends Team