Dario,
It has to do with rules of thumb applied to discounted cash flows of future earnings. The stock is CEDC.
A few “calculators”
http://www.moneychimp.com/articles/valuation/dcf.htm
http://www.creativeacademics.com/finance/dcf.html#what
Basically, when the PEG ratio < 1; the Price that you pay for current earnings is less than the anticipated growth rate of the company. It took me a long time to wrap my brain around this one. A book titled Buffettology by Mary Buffett is a good book to get your feet wet.
Present value = SUM[ (Future cash flows) / (1 + interest rate) ^ (Future year) ]
My friends are always getting caught up in multi-linear regression and covariance and neural-networking logic. Most of the time in real business, it’s just being able to see the easy way to make money; few can do it. I try to keep it simple. I find companies with consistent track records and use their track record to project their future and then discount their expected future to price the company. Then, I try and find reasons not to invest (high debt, slowing cash flows, higher delinquency rates {see accounts receivable and days outstanding}, bad analyst news, anything).
Glen
From: Dario Visnjic
Sent: Saturday, October 25, 2008 5:30 PM
To: Bradford, Glen
Subject: RE: Stocks
Alright
thanks
If CEDE should be $175, why would you sell it at $75?
And could you explain when you said “annual growth rate (5 year projected) gets close to the PE ratio OR PEG ratio > 1,”