By cowering in terror of a stock market tantrum, the Fed has surrendered everything: its vaunted (and completely phony) independence; its duty (yes, go ahead and laugh) to the nation and the real economy-everything. A PEG ratio above 1 indicates a stock that is overvalued relative to the future earnings growth rate, while a PEG ratio below 1 indicates a stock that is undervalued relative to the future earnings growth rate. Declining earnings will lead to a rising P/E ratio, which will hinder the stock from rising in price in the future due to declining valuation.
For example, if ABC Inc’s stock has a P/E ratio of 20, and is growing earnings at only 10% per year, then the PEG ratio is 2.0, which indicates the stock is overvalued relative to future earnings growth, and its prospects of moving higher based on earnings over the next year are not good. However, if ABC Inc’s stock has a P/E ratio of 20, and is growing earnings at only 30% per year, then the PEG ratio is 0.66, which indicates the stock is undervalued relative to future earnings growth, and its prospects of moving higher based on growing earnings over the next year are favorable. It turns out that investing in the stock market is really a financial game of chicken.
Earnings Yield – The Earnings Yield valuation is calculated by taking the earnings per share for the past year (or twelve month period) and dividing the earnings per share by the current market price per share. It is important to keep in mind that future earnings growth is the most important metric when valuing how inexpensive a stock is and what the prospects are for a stock to move higher in price. The cheapest stocks in the stock market are actually the ones that have good projections for futures earnings growth, and are not the necessarily the stocks that trade for the lowest prices and appear cheap.
The stock market is always looking out at least six to nine months into the future, which means any evaluation of future earnings growth should also look out to this time horizon and beyond. Last week the new China-the one that had thrown off the yoke of the Cultural Revolution- televised forced confessions by people who had dared to say that the Chinese stock market may not be a great place to put your money these days. That was implemented to prevent the kind of speculation and instability that is going on in the market today!
The whole point of a stock market is to lessen the risk of investing in a company by making it possible to sell one’s shares at a moment’s notice when the need for cash or the opportunity for a better investment arises. Unsophisticated individual investors (who make up the bulk of investors in China) were propagandized by the Chinese government to put their savings into the stock market The government hoped the market would provide a cheap form of finance for Chinese industry.