Naked PE recognised

4 Comments

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  Graeme December 9, 2007 at 5:34 am

  I did hesitate slightly over including it, because it is not well known (even compared to proprietary measures like EVA). I do not want pages on all the obscure stock picking systems and measures out there!

  However, I think the naked PE deserves to be known because it is genuine valuation ratio. It makes at least as much sense as, for example, PEG.

  Incidentally, thanks for drawing my attention to it: I first read about it on this blog.

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  Richard Beddard December 10, 2007 at 10:31 am

  That’s damning it with faint praise Graeme – comparing it to the PEG! Since the PEG is based either on extrapolating past earnings growth and assuming it continues or using analyst’s projections (which often do the same thing), neither of which are particularly reliable, I’ve always shied away from it.

  That said for short term momentum trading the PEG might have potential. The trouble is I’ve mostly seen it advocated as a way of getting into long term growth stories on the cheap.

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  Graeme December 10, 2007 at 10:57 am

  I certainly do not mean the comparison that way! I agree with you about the PEG. What I mean is that given that the PEG is well known, the naked PE certainly deserves to be well known as well.

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  Richard Beddard December 10, 2007 at 11:23 am

  Ace, well, we’re doing our bit

  I guess the problem is that it’s difficult to calculate. But like you describe in your definition of sector PE investors can calculate the long-term PE (the first stage in calculating the Naked PE) and compare companies to others in the same sector. I think that’s a lot better than using the standard 1 year historical PE, or forward PEs.

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