CRHawk Posted November 7, 2016 Share Posted November 7, 2016 I'm an beginning / intermediate investor who relies heavily on ValueLine and Morningstar. I have a few questions. 1) I understand that the "Line" on Value Line reports is essentially a regression to the mean valuation. If we assume that the market is rational when averaged over time the line is a reasonable valuation. Clearly you still have to do your own thinking to avoid $KO at 30 PE. When I take the average PE they state, average dividend, and a reasonable growth assumption, I can calculate the Dividend Adjusted PEG based upon the mean valuation. This leads to an interesting result. The average valuation implied DAPEG of something like $NSRGY is 2.57. For $DIS it is 1.17. If these are the average DAPEG values investors are buying at over time, doesn't that mean there is a HUGE premium put on the stability/dividend of $NSRGY? It seems to me that if I tended to buy when stocks drop below the Value Line aren't I *much* better off buying low DAPEG stocks like $DIS, $CVS, $SBUX, $SHW, $NKE rather than high DAPEG stocks like $KO, $PEP, $UL, $NSRGY? Is this just the effect of investors reaching for dividend yield, or does the market know something I don't? 2) Using reversion to the mean valuation implies the business is running at a fairly steady state - growth isn't changing. If I wanted to know if growth was slowing for a company like $SBUX or $NKE, what would I look for? 3) I know that using a reversion to the mean valuation isn't as useful for cyclical companies, very new companies, or companies that are more interest rate sensitive like REITs. I'm okay with that. I also avoid trouble by leaning towards high moat companies and low debt companies. I have enough sense to stay away from $KO trading at 30 PE even if that is the current Value Line. But is there something else I'm missing with my approach? 4) Reversion to the mean seems to imply something else interesting. Let's say you have two stable growth stocks. One "should/usually" trades at 15 PE, and another that trades at 25 PE. You can use DAPEG to value them. But if they tend to revert to the same PE, shouldn't you value them as (Current Difference from PE average) + (Dividend) + (Growth)? Meaning the *absolute* PE doesn't really matter? Only the difference from the average PE? Link to comment Share on other sites More sharing options...
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