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The Daily Dow LEXINGTON, Ky. (Apr. 1): Make sure you're not wearing Red today. The Bulls are loose and they're on a rampage to begin the second quarter. After two blockbuster deals this morning set the tone for the most hallowed of Motley Holidays---April Fools' Day---the blue chips had a strong showing, closing the day up more than the 50 points needed to trigger program trading curbs. As you might expect on such a day, the Foolish Four were strong, with three of the four stocks enjoying the day's rally. Only Chevron played the wallflower today.
In the absence of any real Foolish Four news today, let me take this chance to talk about a tool we've been following in the Dow Area, but one many readers are still unfamiliar with---the DPEG ratio. The DPEG is simply a valuation tool derived from Peter Lynch's book "One Up On Wall Street," in which Lynch discusses how he looks at stock valuation as a comparison between growth and the stock's multiple.
This is much like the Fool Ratio for small-cap growth stocks, but the essential difference is by extending the picture forward a few years and by adding in the stock's dividend yield, one can usefully apply this ratio to large-cap stocks like the Dow components, even the cyclicals.
The DPEG is calculated by dividing the stock's P/E ratio by the sum of the estimated 5-year growth rate and the dividend yield.
DPEG = PE / (Growth + Dividend Yield)
The smaller the number, the more undervalued the stock is. When we apply it to the Dow stocks, we aren't necessarily looking for any absolute value to signal a buy or a sell, but rather we're using it as a relative comparison for all 30 Dow stocks. Not surprisingly, many of the highest yielders pointed to by the Beating the Dow approach also show up on the DPEG radar screen.
We don't have any long-term back-testing for the approach because of the difficulty in getting old estimated growth rates. Nevertheless, we're tracking the approach in the Dow area, and for the first quarter at least, it's had a stellar performance, up more than 15% for the top ten stocks. Join us as we continue to track the DPEG portfolio along with the other popular Dow variations.
Transmitted: 4/1/96
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Today's Dow NumbersTHE FOOLISH FOUR (4/1/96) |
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