What are your thoughts on the PEG ratio and its utility for screening and identifying good companies?
Conceptually it makes sense. You want to factor in growth into screening and want cheap companies with good growth prospects.
The problem I run into is that often the ratio is too noisy. The companies with low PEG ratios often have big accounting inflation or special situations that lead to the growth which leaves the ratio to not be that meaningful. The vast majority of the companies you see aren’t all that great.
The other problem I run into is that the ratio is backwards looking. Past growth, especially strong growth, is seldom predictive of the future. As companies mature the growth will naturally slow and eventually stop. Many companies will even decline. Also you end up with too many cyclicals that sure grew well but you’ve screened them at the top.
Not sure how people have approached using this ratio as a tool. Is this part of your repertoire? If so, how do you use it? Is it a meaningful signal for you?