After watching the US indices fall through technical level after technical level, while witnessing the markets sustaining horribly oversold levels, it’s hard to place your bets on technical analysis during turbulent times. However, there is a strategy that will never be outdated: the basic fundamentals, the old tried and tested market analysis that will forever work.
PEG Ratios are so 1970
PEG ratios might seem outdated and overly simplistic, but they work and for good reason. When a company sells for a low price to earnings to growth ratio, its value to investors grow. PEG ratios are an excellent way to make even the most expensive growth stocks look more like blue chips. Analyzing earnings to growth is a much better method than comparing PE ratios, which focus on earnings only and do not produce the same results as throwing in the extra variable of the growth rate.
The PEG ratio makes sector shopping much easier. When comparing two companies in the same industry side by side, it’s hard to make a distinction between the two. Comparing Coke to Pepsi is like comparing two cardboard boxes; there are minimal differences outside the consumer experience. When comparing the PEGs side by side, however, we get a much different answer. Coke (KO) trades for a PEG ratio of 1.67 while Pepsi (PEP) maintains a much lower PEG ratio of 1.43. Excluding all other possibilities, Pepsi is selling at a discount to Coke and could quickly catch up to the same proportional valuation. Or, of course, Coke could fall to meet Pepsi’s value.
Famed investor Warren Buffett may be taking a toll in recent months, but his investment strategy of picking solid firms with good management is what made him a billionaire. CEOs are the lifeblood of any business; they must be both a manager and a speculator to make good moves even in bad markets. Those with an entrepreneurial knack will always fair better in bad times because they have the ability, capacity and patience to move their business where it can best perform. It takes tremendous nerve to stand by your strategy when the cards are stacked against you, but the best manager will always find a way out of the mess. Recent changes in corporate management have made Wall Street look like the MLB pre-season, but inevitably, some companies picked up some quality CEOs, while others dumped the under-performing personnel.
Buying Non-Discretionary Names
There will always be demand for consumer products like shampoo, toothpaste, soaps and toilet paper. The companies that produce these products are some of the biggest on the exchanges, ranging from Johnson and Johnson to Colgate Palmolive. In good economic times, these companies produce decent earnings, and their stock prices are always quick to move when the economy enters a recession.