Welcome to PEGwatch, the new Slater Investments blog. Why PEG and why are we watching her? The her is an it, the PE/Growth ratio and it plays a central role when we sift through potential investments. High growth companies can look very impressive but with their high growth often goes a high PE multiple. Profits growth of 30% and PE of 60 gives a PEG of 2, which is risky as an entry point. On the other hand a PE of 10 can look tempting but if profits are only crawling along at 5% per year then the PEG is also 2, and again unattractive for a growth company.
Admittedly in the year of Covid-19 there are not many companies offering consistent earnings growth. The strict Slater criterion for growth companies is to insist on a minimum of historic and two years of forecast profits growth. During a record economic slump many excellent businesses are dipping into the red or at least seeing profits go backwards this year. So insisting on only looking at businesses with unblemished records will be self-defeating. Luckily pandemics do disappear over time and often surprisingly fast. Judging how far we need to look to the other side of the valley, beyond Covid-time, has made us all armchair pundits. Instead of attempting bogus precision, we find it more productive to look some years beyond. We like to hold positions for several years, so we need to have a picture of where a company is going in that time. And we expect chief executives to be able to describe the journey clearly and articulately. That said, the PEG remains a foundation in appraising the attractiveness of a business. It is simply that during the current mayhem we have to apply it more judiciously.