Time for Healthcare Information System Stocks?

For some time now, I have been watching Healthcare Information System stocks. All around the world, there is a trend towards digitizing medical and patient information. Healthcare Information System companies have a bright future.

However over the last three years, the stock price of several of the companies I have been watching have gone nowhere.

Over the last 6 days (August 5, 2008 to August 12, 2008), I've noticed good performance from these stocks:

1. SPY (S&P 500 ETF): +0.77%
   
2. IWM (Russell 2000 ETF): +3.27%
   
3. IYH (Healthcare ETF): +1.33%
   
4. QSII (Quality Systems): +24.2%
   
5. MDRX (Allscripts): +26.69%
   
6. CERN (Cerner): +4.11%
   

Over the last 97 Days (March 27, 2008 to August 12, 2008), the performance has been similar:

1. SPY: -2.1%
   
2. IWM: +7.56%
   
3. IYH: +7.06%
   
4. QSII: +30.36%
   
5. MDRX: +73.4%
   
6. CERN: +21.3%
   

The Three Companies, QSII, MDRX, and CERN have been outperforming recently.

Stock Performance Comparison

Quality Systems (QSII)

Market Cap: $1.1 B
Forward PE: 19.57
5 Yr Est Growth: 20%
PEG: 0.98 (less than 1 is low!)

Allscripts (MDRX)

Market Cap: $890 M
Forward PE: 20.95
5 Yr Est Growth: 22.27%
PEG: 0.94

Cerner (CERN)

Market Cap: $3.78 B
Forward PE: 18.09
5 Yr Est Growth: 23.66%
PEG: 0.76



With a long term future, these stocks are the growth stocks of the future, and maybe these stocks will finally break out and do something over the next few years.

Results of 3 Portfolios: Cheap Growth Ready to Breakout (April 15, 2008)

In a previous article, we described the Cheap Growth Ready to Breakout Screen.

In this post, we will continue to track the performance of three portfolios. We are taking the snapshot as of Tuesday, April 15, 2008. We previously had a snapshot on July 17, 2007.

==============================
Portfolio 1: February 23, 2007
==============================

#	Symbol	Start	End	Return
1	AMX	46.89	64.06	36.62%
2	TSM	10.91	10.36	-5.04%
3	VIP	17.04	31.34	83.92%
4	IPR	73.35	83.65	14.04%
5	AYE	47.64	52.40	9.99%
6	WCRX	15.15	17.48	15.38%
7	BRP	41.40	76.50	84.78%
8	SCS	17.24	10.80	-37.35%
9	MLHR	39.16	22.47	-42.62%
10	AIR	30.61	20.80	-32.05%
11	GRT	25.53	11.94	-53.23%
12	DVR	12.49	11.95	-4.32%
13	TGI	54.92	55.15	0.42%
14	CRAI	53.88	32.36	-39.94%
15	TLF	7.99	2.75	-65.58%
16	APH	33.85	41.08	21.36%
17	GIL	26.80	33.63	25.49%
18	MIDD	58.88	61.90	5.13%

Total 0.94%

SPY 141.96 133.24 -6.14%
IWM 81.44 69.01 -15.26%
EFA 74.77 73.31 -1.95%

===========================
Portfolio 2: March 14, 2007
===========================

#	Symbol	Start	End	Return
1	TSM	10.60	10.36	-2.26%
2	DISH	38.26	30.49	-20.31%
3	WFR	55.05	72.28	31.30%
4	ASX	4.98	5.03	1.00%
5	SPIL	8.73	8.73	0.00%
6	BRP	41.75	76.50	83.23%
7	LAUR	59.28	61.95	4.50%
8	KSU	33.65	40.54	20.48%
9	BEAV	30.73	34.01	10.67%
10	CVO	24.50	9.94	-59.43%
11	IART	43.45	41.65	-4.14%
12	KNL	22.39	10.94	-51.14%
13	AIR	30.25	20.80	-31.24%
14	MYE	17.63	12.08	-31.48%

Total -3.49%

SPY 136.08 133.24 -2.09%
IWM 76.72 69.01 -10.05%
EFA 71.02 73.31 3.22%

=========================
Portfolio 3: May 16, 2007
=========================

#	Symbol	Start	End	Return
1	ESV	58.35	65.00	11.40%
2	RIG	90.43	149.30	65.10%
3	TDW	64.24	57.44	-10.59%
4	KB	93.35	66.57	-28.69%
5	FCX	70.25	105.50	50.18%
6	VLO	71.62	48.56	-32.20%
7	NBG	11.33	10.14	-10.50%
8	ACGY	21.16	25.50	20.51%
9	AYR	33.27	12.85	-61.38%
10	FTI	36.84	66.17	79.61%
11	HXM	62.29	61.50	-1.27%
12	SZE	57.58	68.75	19.40%
13	SLB	75.86	91.13	20.13%
14	CLB	92.77	137.91	48.66%
15	CKR	20.08	11.04	-45.02%
16	CEPH	80.14	62.67	-21.80%
17	TDK	86.09	62.72	-27.15%
18	SNDA	26.65	26.44	-0.79%
19	LKQX	12.15	20.11	65.51%

Total 7.43%

SPY 148.71 133.24 -10.40%
IWM 81.06 69.01 -14.87%
EFA 78.14 73.31 -6.18%

The Results

SPY represents the S&P 500 ETF, IWM represents the small cap Russell 2000 ETF, and EFA represents the Developed International ETF.

Looking at all three portfolios, the Cheap Growth Ready to Breakout Screen outperformed:

1. Outperformed the S&P 500 in 2/3 portfolios with an average outperformance of 7.84%
   
2. Outperformed the Russell 2000 in 3/3 portfolios with an average outperformance of 15.02%
   
3. Outperformed the EFA in 2/3 portfolios with an average outperformance of 3.26%
   

Notes

1. Prices used are the adjusted prices based on Yahoo Finance. Price is adjusted based on splits and dividends.
   
2. LAUR (Laureate Education) no longer trades as LAUR. The last known price is used.
   
3. GSF (Global Santa Fe) merged with Transocean (RIG). The RIG stock price is used here.
   

Yahoo/Google Revisited, Quick Valuation Update

We are in the middle of the great Information Revolution and some companies have to make sense out of all the data in the world and make it useful to the end user.

Google (GOOG) is an obvious play and so is Yahoo (YHOO).

GOOG is the one which is most likely a better investment.

GOOG has a forward PE of 32, 5 year growth rate of 34.4% for a Price to Earnings Growth Rate Ratio (PEG) of a very low 0.93 (under 1 is very cheap, over 2 is overvalued).

Ignore the actual price of the stock (GOOG is close to $700), and pay more attention to the other measures of valuation.

YHOO (Yahoo) has a forward PE of 42.63 and a 5 year estimate growth rate of 25.4% for a PEG of 1.70.

The PEG of Yahoo (YHOO) is still under 2, but Google (GOOG) is still a great value and worth investing in.

Water, Energy, and Minerals with Layne Christensen (LAYN)

Today, on Mad Money, Jim Cramer seems to have offered no opinion on Layne Christensen (LAYN). While it may initially sound like a retailer, Layne Christensen is really a good $1 Billion industrial company.

Layne Christensen (LAYN) provides drilling and construction services for:
1. Water and Wastewater Infrastructure (largest part of the business)
2. Mineral Exploration (2nd largest part of the business)
3. Energy
4. Other

All sectors are in bull market mode. Water and water infrastructure is a critical need in the US and around the world. Some people consider water to be the next Oil.

Mineral Exploration is also very important. Basic minerals are important to help global growth. The same situation occurs with energy.

Layne Christensen (LAYN) has a forward PE of 26, 5 year estimated growth of 31% for a very cheap 0.83 PEG ratio (under 1 is very cheap).

Stock is very strong, and has reached its 52 week high.

Recently, however, the company announced that it may be selling $172 Million worth of shares. Having more shares in the market dilutes the value of each share.

Maybe, after more research, you should consider Layne Christensen (LAYN) on a pullback or after all the extra shares are offered on the market.

Growth Stock Valuation (September 25, 2007)

Growth Stocks such as Apple (AAPL) and Google (GOOG) have been doing well and have recently reached their 52 week or all time highs. But when are these growth stocks overvalued?

One rule of thumb that is very useful with stocks (especially growth stocks) is to use the PEG ratio, or the Forward Price Earnings ratio divided by the 5 year estimated growth. A PEG ratio over 2 is considered overvalued, and a PEG ratio under 1 is considered very cheap.

Table of Selected Growth Stocks

Here are a few growth stocks with different PEG ratios. Data from Yahoo Finance, Tuesday, September 25, 2007:

Symbol	Stock Name	PEG	Forward PE	5 yr growth
AMX	America Movil	0.46	15.12	32.65%
HRS	Harris	0.56	15.17	27%
TDG	Transdigm Group	0.65	18.58	28.50%
HANS	Hansen	0.66	25.74	39.09%
WBD	Wimm Bill Dann	0.67	23.53	35.00%
SNDA	Shanda Interactive	0.71	20.73	29.39%
ABB	ABB	0.78	19.43	25.00%
GOOG	Google	0.87	29.13	33.65%
CROX	Crox	0.96	25.55	26.57%
RIMM	Research in Motion	1.12	34.46	30.82%
CSCO	Cisco	1.15	17.73	15.43%
JSDA	Jones Soda	1.15	42.77	37.07%
ISRG	Intuitive Surgical	1.35	54.20	40.05%
GME	Gamestop	1.40	29.10	20.75%
AAPL	Apple	1.46	34.66	23.67%
BIDU	Baidu	1.48	81.06	54.60%
GRMN	Garmin	1.56	30.15	19.38%
NVT	Navteq	1.69	39.81	23.49%
YHOO	Yahoo	1.99	48.20	24.19%
AMZN	Amazon.com	2.59	60.70	23.42%

Chart of Growth Stocks

Here's a Chart of the different growth stocks sorted by PEG. In the graph, PEG is multiplied by 20. So an adjusted PEG of 15 means PEG is 15/20 or 0.75:

Three International Food and Beverage Plays to Get Away from US Credit Concerns

With the United States suffering a credit crunch, people are suggesting that investors get out of financials and into consumer staples, and companies with international exposure such as Kraft (KFT) or Procter and Gamble (PG). While this is a good idea, another good play would be to play sectors which have a very low correlation to US Financials. Why not invest in international food and beverage companies which are more levered to the economy they serve?

Here are three interesting international food and beverage stocks:

1. Central European Distribution Corporation (CEDC):

CEDC is the largest vodka producer in Poland by value and produces the Absolwent, Zubrowka, Bols and Soplica brands, among others. CEDC currently exports Zubrowka to European and Asian markets. CEDC imports many of the world's leading brands to Poland, including brands such as Remy Martin, Metaxa, Jim Beam, Sauza Tequila, Grant's, E&J Gallo, Sutter Home, Torres, Penfolds and Concha y Toro wines, Corona, Foster's, and Guinness Stout beers and Evian.

CEDC is also benefitting from a strong Polish economy, growing at a good 6.4% rate in the 2nd quarter of 2007. They are even getting Russian exposure, as they recently announced their intent to acquire a significant majority interest in a Russian company which owns the number one premium vodka brand in Russia, Parliament Vodka.

This $1.65 Billion company has a Forward PE of 20.48, and a five year estimated growth rate of 17.5% for a reasonable PEG of 1.17. It is near its 52 week high and there are currently only five analysts covering the stock.


2. Wimm Bill Dann (WBD):

Wimm Bill Dann is a $4.14 Billion Russian Food company offering a range of branded dairy, juice, water and baby food products. It has a forward PE of 20.35, a five year estimated growth rate of 35% for an inexpensive PEG of 0.58 (less than 1 is very cheap).

According to the company, Wimm Bill Dann produces its dairy products in the region where they are consumed. Also, from 1999 to 2003, Wimm Bill Dann had modernized. Prior to 1999, Russia suffered a deficit in raw milk, particularly a deficit in high quality raw milk. The number of head of cattle had diminished while productivity had not grown quickly enough. So Wimm Bill Dann invested in modern Swedish milking and refrigeration equipment and later, invested in harvesting equipment. This modernization program reaped benefits greatly increasing the percentage of high quality milk.

Wimm Bill Dann also has a 20% share in the Russian Juice Market (as of 2005).

TheStreet.com's Ratings consistently rates Wimm-Bill-Dann as one of their top five fast growth stocks.


3. Ambev (ABV):

Ambev is a $43 Billion Brazilian company that produces, distributes and sells beer, carbonated soft drinks and other non-alcoholic and non-carbonated products principally in Latin America. It also bottles, sells and distributes PepsiCo International products outside of the United States. The company has a forward PE of 20.76, a five year estimated growth rate of 13%, for a reasonable PEG of 1.59. The company even has a forward yield of 1%, and only three analysts cover the stock. Institutional ownership of this stock is only 19.80%.

Ambev has an Operating Margin of 29.25%, greater than competitors such as Formento Economico Mexicano (FMX) of 13.2%.

The company Quilmes Industrial (LQU) is a subsidiary of Ambev.


Conclusion

After reading and studying the three companies, I hope that you feel like you are in another world, far away from any United States credit problem. Central European Distribution (CEDC), Wimm-Bill-Dann (WBD), and Ambev (ABV) are three great ways to get away from it all.

Investing in Taiwan Stocks from the USA

Taiwan lies 120 km off the southeast coast of mainland China. Taiwan is part of the "Four Asian Tigers", which includes the economies of Hong Kong, Singapore, South Korea, and Taiwan. These four countries pursue an export-driven model of economic development and these countries focus on developing goods for export to highly industrialized nations. "Real growth in GDP has averaged about 8% over the past three decades. Exports have grown even faster and have provided the primary impetus for industrialization. Inflation and unemployment are low; the trade surplus is substantial; and foreign reserves are the world's third largest." (Wikipedia)

The most diverse way to invest directly in Taiwan is to invest in the Taiwan ETF (EWT). This Exchange Traded Fund invests in Taiwanese companies that many people in the US have difficulty purchasing through a US brokerage.

Alternatively, an investor in the United States can purchase stock in certain individual Taiwanese companies through American Depository Receipts (ADR). Many of the Taiwanese ADRs are Semiconductor Companies. Exemptions include Chunghwa Telecom (CHT), a Telecom Company, and AU Optronics (AUO). AU Optronics engages in the "design, development, manufacture, assembly, and marketing of thin film transistor liquid crystal display (TFT-LCD) panels and other flat panel displays."


By the Numbers

Data taken from Yahoo Finance on Wednesday, July 18, 2007:

Symbol	Stock Name	Market Cap	MyPEG	Fwd PE	5 yr growth	Yield
ASX	Advanced Semi Engineering	6.42 B	0.24	10.31	38.17%	0%
SIMO	Silicon Motion Tech	817 M	0.38	15.63	35.00%	0%
TSM	Taiwan Semiconductor	58.66 B	0.46	14.56	24.93%	3.1%
HIMX	Himax Technologies	1.03 B	0.50	9.91	17.50%	0%
AUO	AU Optronics	12.88 B	0.53	11.42	20.00%	0.4%
UMC	United MicroElectronics	12.56 B	0.65	18.58	20.00%	0%
SPIL	Siliconware Precision Industries	6.29 B	0.68	12.71	17.50%	0%
MXIC	Macronix International	14.72 B	N/A	N/A	N/A	0%
CHT	Chunghwa Telecom	18.46 B	N/A	N/A	N/A	5.4%

In order to understand the chart, we have to understand the different elements.

MyPEG

MyPEG is my own variation of the PEG Ratio. A MyPEG of less than one means the stock is cheap relative to its growth. A MyPEG of greater than two means the stock is very expensive relative to its growth. More info on MyPEG in this link. MyPEG incorporates the yield and cash per share.

Forward PE

Forward PE is the Price divided by Forward estimated earnings. When choosing between a stock that has a PE of 15 and a growth rate of 15% vs. a stock that has a PE of 30 and a growth rate of 30% (both have a PEG ratio of 1), I'll prefer the former. The reason is that high PE's are often priced to perfection. Any miss and high PE stocks can get hit very hard. Stocks with Lower PEs have less expectations and have a greater margin of safety. Another reason is that I have more confidence in the forward PE than the 5 yr. estimated growth rate. So the results are better by preferring the lower PE stock given an equivalent PEG or MyPEG because the 5 year growth rate is given less importance. Lastly, stocks can't maintain 30% plus growth for long periods of time, so growers from 15-30% might be preferred.

5 Yr Growth

5 Yr Growth is an estimate by the analysts. As I discussed earlier, the higher the better, though some people such as the legendary Peter Lynch have suggested that buying fast stocks, but not too fast, might be a good idea (from Peter Lynch's One Up On Wall Street : How To Use What You Already Know To Make Money In The Market).

Yield

The higher yield, the better. If you have a high yield, high growth, and low PE, that's a good combination.

Video Blog

Here's a WallStrip Video Blog on Semiconductors featuring SPIL and ASX:
WallStrip Semiconductor Video.

Drink and Soda Stocks By the Numbers

In this article, we look at different Drink and Soda Stocks and look purely at the raw numbers. (Data taken from Yahoo Finance on Thursday, June 21, 2007):

Symbol	Stock Name	MyPEG	Forward PE	5 yr growth	Yield
HANS	Hansen Natural	0.77	22.80	28.60%	0%
CEDC	Central European Distribution	0.96	18.10	17.50%	0%
STZ	Constellation Brands	1.25	14.48	11.50%	0%
JSDA	Jones Soda	1.27	46.88	34.00%	0%
DEO	Diageo	1.30	17.22	10.50%	2.30
PEP	Pepsi	1.32	17.85	11.00%	2.30
BUD	Anheuser-Busch	1.52	17.13	9.00%	2.20%
KO	Coca Cola	1.58	18.15	8.50%	2.60%

In order to understand the chart, we have to understand the different elements.

MyPEG

MyPEG is my own variation of the PEG Ratio. A MyPEG of less than one means the stock is cheap relative to its growth. A MyPEG of greater than two means the stock is very expensive relative to its growth. More info on MyPEG in this link.

Forward PE

Forward PE is the Price divided by Forward estimated earnings. When choosing between a stock that has a PE of 15 and a growth rate of 15% vs. a stock that has a PE of 30 and a growth rate of 30% (both have a PEG ratio of 1), I'll prefer the former. The reason is that high PE's are often priced to perfection. Any miss and high PE stocks can get hit very hard. Stocks with Lower PEs have less expectations and have a greater margin of safety. Another reason is that I have more confidence in the forward PE than the 5 yr. estimated growth rate. So the results are better by preferring the lower PE stock given an equivalent PEG or MyPEG because the 5 year growth rate is given less importance. Lastly, stocks can't maintain 30% plus growth for long periods of time, so growers from 15-30% might be preferred.

5 Yr Growth

5 Yr Growth is an estimate by the analysts. As I discussed earlier, the higher the better, though some people such as the legendary Peter Lynch have suggested that buying fast stocks, but not too fast, might be a good idea (from Peter Lynch's One Up On Wall Street : How To Use What You Already Know To Make Money In The Market).

Yield

The higher yield, the better. If you have a high yield, high growth, and low PE, that's a good combination.

Symbol	Stock Name	EV/EBITDA	%Short	%Inst. Own
HANS	Hansen Natural	23.89	14.70%	60.70%
CEDC	Central European Distribution	16.51	10.20%	62.30%
STZ	Constellation Brands	9.81	11.40%	83.90%
JSDA	Jones Soda	105.68	26.30%	27.30%
DEO	Diageo	13.42	0%	18.70%
PEP	Pepsi	12.59	0.60%	68.50%
BUD	Anheuser-Busch	11.17	0.90%	63.00%
KO	Coca Cola	15.35	1.30%	64.50%

EV/EBITDA

Enterprise Value divided by Earnings Before Interest, Taxes, Depreciation and Amortization. It is another measure of valuation. The lower the Better. A value of 8 or less is very good.

% Short

The higher the percentage, the higher number of people who believe the stock should go down. However, the higher the percentage, the better for those who go long because if good news is to hit a stock, not only does the price go up, but all those people who are shorting have to "cover" (Buy a stock to fulfill their loan obligation to the broker) their short position further fueling the gains. This is often called a "short squeeze".

% Institutional Ownership

People have different theories on this. Some people, like Peter Lynch, prefer a stock without that much institutional ownership. Because once the big mutual funds discover the stock, this could propel the stock to multibagger (make many times your money on your original investment) heights. However, some prefer a higher institutional ownership because that means that mutual funds and other institutional investors are already buying the stock (and may have them in their approved to buy list), and when more money comes in, they may add to their position.

Conclusion

Based on all this and based on just the numbers, Hansen Natural (HANS) and Central European Distribution Corp (CEDC) seem to have the best Growth at a Reasonable Price ratings.

Note that there are other companies that were not looked at including AmBev (ABV), a South American Drink Company, and National Beverage Corp (FIZZ), because there was some missing information. They could still be very good investments, however.

Improved Version of the PEG Ratio

In a previous article, we used the PEG ratio to evaluate a stock. While the PEG ratio is a good method, I've decided to create my own variation of the PEG ratio which I'll call MyPEG.

The Formula is this:

MyPEG = ((Current Price - Cash Per Share) / Forward Earnings) /
(Yield + 5 Yr Estimated Growth Rate).

What this does is take into consideration the dividend yield of a stock. It also takes into consideration how much cash is in the stock. As legendary investor Peter Lynch said, by taking cash per share into the equation, we might be able to find great bargains out there.

We will still use MyPEG the same way as PEG. A MyPEG < 1 means the stock is cheap, while a MyPEG > 2 is very expensive. We can compare stocks using MyPEG, but it's better to compare stocks in the same industry.

How to find the numbers through Finance.Yahoo.com

Go to Finance.yahoo.com and enter your stock symbol. You get a nice summary page with basic information and news. A very useful page is the Key Statistics Tab.

You can find this information there:

1. Market Cap: Top Part of Page
   
2. Trailing PE: Top Part of Page
   
3. Forward PE: Top Part of Page
   
4. Price: Very Top of Page
   
5. Cash per Share: Bottom Left side under Balance Sheet.
   
6. Yield: Lower right corner under Dividends and Splits
   

Another useful tab is the Analysts Estimates Tab.

You can find this information there:

1. Trailing 12 months Earnings: Top part of Page, look at Year Ago EPS under Current Year (Dec-07).
   
2. Current Year Earnings: Top part of Page, look at Avg. Estimate under Current Year (Dec-07).
   
3. Future Earnings: Top part of Page, look at next Year, Avg. Estimate
   

So to calculate the MyPEG of General Electric (GE):

MyPEG = ((Current Price - Cash Per Share) / Forward Earnings) /
(Yield + 5 Yr Estimated Growth Rate).

1. Current Price (June 22, 2007): 38.24
   
2. Cash Per Share: 1.872
   
3. Forward Earnings: 2.49
   
4. Forward Yield: 2.90%
   
5. 5 Yr. Estimated Growth: 10%
   

MyPEG = ((38.24 - 1.872) / 2.49) / (2.9 + 10)
= 1.13

Note regarding Banks and Brokers

You shouldn't use items like Cash Per Share in companies such as Banks or Brokers. It won't be accurate. Just see the Cash Per Share of Goldman Sachs (GS): 1,769. Not a valid number to use in the MyPEG formula.

Credits

I came up with adding Yield to the 5 Yr. Growth Rate by myself. I was inspired to use the cash per share method by reading Peter Lynch's One Up On Wall Street : How To Use What You Already Know To Make Money In The Market, an excellent book. I definitely recommend it. (Other Book Recommendations in the link or to the section to the right).

I combined both methods and created the MyPEG.

Note on PEG and Growth Rates

In other posts such as this analysis of Computer and Video Game Stocks, I often put in this section regarding PEG and Growth Rates because Growth Rates are estimates and may not be as reliable:

"When choosing between a stock that has a PE of 15 and a growth rate of 15% vs. a stock that has a PE of 30 and a growth rate of 30% (both have a PEG ratio of 1), I'll prefer the former. The reason is that high PE's are often priced to perfection. Any miss and high PE stocks can get hit very hard. Stocks with Lower PEs have less expectations and have a greater margin of safety. Another reason is that I have more confidence in the forward PE than the 5 yr. estimated growth rate. So the results are better by preferring the lower PE stock given an equivalent PEG or MyPEG because the 5 year growth rate is given less importance. Lastly, stocks can't maintain 30% plus growth for long periods of time, so growers from 15-30% might be preferred."

Evaluating stock using the PEG Ratio.

P/E Ratios

In evaluating stocks, many people look at the P/E multiple, or the Price to Earnings multiple. This is found by dividing the stock's current price by a companies trailing or expected future earnings.

For example, if we look at the stock of General Electric (GE) as of June 22, 2007, we see the trailing P/E ratio is 18.95, and the forward or estimated P/E ratio is 15.36.

Difference between Trailing and Forward PE

You might ask, what is the difference between the Trailing and Forward PE ratio? The trailing PE ratio refers to the price divided by the previous twelve months earnings. Those earnings were already reported, so the trailing PE can't be debated. Trailing PE is a way to see how the company did in the last twelve months.

Now the Forward PE ratio is calculated by dividing the current stock price by the estimated 12 months future earnings. There are analysts out there who predict how much a company will make in the next twelve months. Using the Forward PE is a way of seeing how a company will do in the future.

I personally prefer looking at Forward PE because I prefer looking at where a company will be going more than where a company's been in the last 12 months.

Is it better to buy a stock with a low PE or high PE?

Looking at the PE multiple by itself, it is hard to judge whether it is better to buy the stock. A company with a high PE might be justified in having a high PE because it is growing at a very fast rate. A company with a low PE might be priced correctly because it is growing at a very slow rate. However, what if a company has a high PE but the company is growing at a very slow rate? Or what if a company has a low PE but the company is growing at a very fast rate? With the former, you would say that the company is greatly overvalued. With the latter, you would say that this is a bargain!

PEG Ratio

Based on this, we can't look at the PE ratio to judge a company. We want to buy a company that is reasonably priced with respect to its growth rate. So that's where we come up with the PEG ratio, or the PE ratio divided by the companies growth rate.

Using GE again, we find, that GE has a forward PE of 15.36, and the 5 yr growth rate of 10%. So that means the PEG of GE is: 15.36/10 = 1.536.

So how do we use this number?

In general, if the PEG of a company is less than 1, the company is considered a very good value. If the company has a PEG greater than two, the stock is considered very expensive and it is best that it be avoided. With GE above having a PEG of 1.53, it is reasonable, but not extremely cheap.

Comparing PEGs

We could compare stocks and compare PEGs and choose the lower ones, but we could do better. It's better to compare the PEG of a company with its competitors or its industry because each sector might have a different range of good PEGs. You can use the PEG to choose the best stock in a sector.

Finding the information through Yahoo Finance

Now, you might want to know how to find the information in Yahoo finance. Go to finance.yahoo.com and enter your stock. You can see a nice summary page and find news stories about the stock, a companies market cap, and the Trailing PE ratio.

To find more details about the stocks, go to the Key Statistics tab. You can find the Trailing PE and the Forward PE. The PEG Ratio is also mentioned, but I prefer to calculate the PEG ratio myself.

If you want to manually calculate the PEG ratio yourself, you can find the forward PE, and then find the 5 yr estimated growth rate through the Analysts Estimates Tab. Go to the bottom part of the page and look for the 5 yr Estimated Growth. The Growth Rate of GE in this page is 10%.

So Forward PE = 15.36, Growth = 10%, so PEG is 1.536.

This investing style (by using PEG ratio) is called Growth At a Reasonable Price or GARP.

Improved Version of PEG incorporating Yield and Cash Per Share

The PEG ratio above is biased against slower growers with lots of cash and a good yield. So in order to incorporate this fact, I've developed the MyPEG. More information in this link.

Next Generation Apple iPhone will have GPS chips

According to AppleTech TV news, the next generation of Apple iPhone may have GPS chips.

This makes sense as Location Based Services are going to increasingly integrated into anything that moves from cars, to cell phones, to cameras.

SIRF, the Leading maker of GPS Chips looks to benefit from this trend and it is very cheap here. Using information from Yahoo Finance:

Price: 22.98
Forward PE: 17.28 (yesterday, it was 16.39)
5 Year Estimated Growth: 30%
PE/G: .57

A PEG ratio of .57 (less than 1 is dirt cheap) for great growth is a bargain. GPS chips will be everywhere, and SIRF is a leader in this area. Global Locate, a private company, is a competitor, but I see SIRF remaining dominant in this area.

When you compare other companies in the location based service area by looking at their forward PE:
Garmin (GRMN): 19.98
Navteq (NVT): 27.60

SIRF looks cheap here for its growth.

Lenny Dykstra of TheStreet.com also had some good things to write about SIRF.

For the long term, SIRF looks like a buy here, but be aware of the volatility and keep your eye out for any real competitors which I do not see right now.