Monday, August 12, 1996

But the DPEG's So Ugly!?
by MF DowMan

There have been many questions recently about the fact that several of the Dow Approach current stocks to buy have DPEG price targets that suggest that the stocks are over-priced. (For the details on the DPEG ratio, check out the Fribble titled "The DPEG Revisited.")

Here's my take on the dilemma. We have decades of data demonstrating how well the Dow Approach has done by using the simple high-yield, low-price criteria. We don't have any data supporting the DPEG ratio as a good predictor for large-cap stocks.

In addition, the research I've come across recently (especially James O'Shaughnessey's new book, What Works On Wall Street, due out this month) demonstrates convincingly that a high yield is the best indicator of value for these large-cap stocks.

So while the DPEG is an interesting factor to watch and consider, my feeling is that if you're using the Dow Approach, don't try to out-smart it on a stock-by-stock basis. I suspect that's the quickest way to ruin its effectiveness. Will it be right in every case? Of course not. It doesn't have to be to be useful, though. As long as it continues to beat the market consistently, and by a significant margin, it's a wonderful approach, even with whatever flaws one ascribes to it. So, above all, keep Beating the Dow author Michael O'Higgins' first rule in mind: Keep it simple!

Transmitted: 8/12/96