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Friday, July 23, 2010

How to use PEGGY Method to select stock

If you want to buy a good stock, you need to know a lot of the company info, eg industry PE, economy, profit margin, competition, industry growth, exchange rate, new project, management, cash flow, major
customer, geographical risk, etc.

Everybody is so busy, where got time or knowledge to check or how to know so much. But if you buy without knowing a bit of info, also very dangerous. So I come with PEGGY Method for stock selection.

PE, G, G, Y
PE: PE ratio, price over earning per share, the lower the better.
G: Growth of future earnings/net profit. The higher % the better.
G: Gearing. About the company's borrowings. The lower the better.
Y: Yield, dividend yield. The higher the % the better.

PE: Low
G: High
G: Low
Y: High

If remisier recommends a stock, example ABC:
You: What to buy?
Remisier: Can try ABC at RM1.95. Fair value RM2.40
You: PE low?
Remisier: 11.2, Average
You: How about future growth?
Remisier: 14%. Indonesian and Thailand operations just started
You: How about gearing or borrowings
Remisier: No borrowings, net cash
You: How about the dividend yield?
Remisier: Got 5%-6%, paying 60% profit as dividend.
You: Sound good, buy 2 lots at RM1.95

If remisier recommends a stock, example XYZ:
You: What to buy?
Remisier: Can try XYZ at RM44, good dividend
You: PE low?
Remisier: high, about 18.
You: How about future growth?
Remisier: Next few years negative or no growth
You: How about gearing or borrowings
Remisier: High borrowings
You: How about the dividend yield?
Remisier: Got 5% dividend yield or less.
You: Dividend yield 5% good, but other things are bad. Not interested

From the above, you can use PEGGY method to select stock. If you are not familiar with stock market or financial term, no need to know the exact figure or percentage. Just need to know whether is high or low. Just ask your remisier PEGGY questions. Very difficult to get all PE G G Y perfect. So, if example PE, G, G are good, but the Yield a bit low, then can be considered. No need so rigid, up to you. The above example
ABC, the PE is average but all are good, so can considered. If you can find one counter all PEGGY is good, just buy it and then let me know. I will buy.

1 comment:

  1. useful explaination for a beginner like me. Thanks.




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