How would you balance a stock’s valuation when comparing its ratios to the industry average versus its own growth potential?
I’ve built a stock analysis website and soon to be app called Auspex that scores companies on a 0-100 scale. Right now, the algorithm evaluates financial health by benchmarking standard valuation ratios directly against industry peers. However, this heavily penalizes high-growth companies that look wildly overvalued compared to slow-moving competitors.
To counteract this, Forward PEG is in the mix to capture that future upside. My uncertainty is that Forward PEG is not enough to counteract the heavy drag from the other lagging peer ratios without weighting it so heavily that it skews the entire model. The rankings perform delightfully, but I want to keep increasing the success rate of my recommended stocks further.
If you were building a model to score stock health, how would you balance current peer metrics against future growth potential? Is it better to just tweak the weight of the Forward PEG, or should I be looking at a completely different mix of forward-looking metrics to offset the industry averages?
I would love to hear how you handle the industry versus growth potential trade-off in your own valuation models.