Title page for ETD etd-04172011-162534


Document Type Master's Dissertation
Author I'Ons, Trevor Andrew
URN etd-04172011-162534
Document Title Improving the PEG ratio
Degree MBA
Department Gordon Institute of Business Science
Supervisor
Advisor Name Title
Prof M Ward Supervisor
Keywords
  • abnormal returns
  • benchmarking
  • analyst forecast
  • accuracy
Date 2010-11-10
Availability unrestricted
Abstract

The effectiveness of the PEG ratio as a valuation tool has been a topical debate between market commentators ever since being popularised by Lynch (1989). This study examines the appropriateness of the fair value criteria of 1.0 (PEGL) in comparison with a time-series based share specific benchmarking model (PEGT). Furthermore, influencing factors of analyst forecasting accuracy, namely: the number of analyst contributions, forecast dispersion and forecast horizon, were tested and compared using sub-set portfolios for each category with the objective of identifying a possible optimal PEG trading rule strategy.

The outcome showed a consistent outperformance of PEGT portfolios compared to PEGL portfolios and the market benchmark. Unexpected results were obtained for the impact of analyst forecasts on the performance of the PEG ratio with additional literature review providing possible reasons that analyst optimism may have a more influencing impact on the PEG ratio than forecasting accuracy. Finally, an optimised PEG trading rule strategy delivered annual abnormal returns of 5.4% (CAGR: 19.7%) for a PEGL portfolio, versus that of 13.7% (CAGR: 28.5%) for a PEGT portfolio. The ensuing methodology appeared to single out small cap firms with above market growth prospects.

Copyright 2010, University of Pretoria. All rights reserved. The copyright in this work vests in the University of Pretoria. No part of this work may be reproduced or transmitted in any form or by any means, without the prior written permission of the University of Pretoria

Please cite as follows:

I'Ons, TA 2010, Improving the PEG ratio, MBA dissertation, University of Pretoria, Pretoria, viewed yymmdd < http://upetd.up.ac.za/thesis/available/etd-04172011-162534/>

F11/208/ag

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