DaveJ

How Can the PEG Ratio Be Used to Value Stocks?

First of all you should have exponents. It looks like you are multiplying by 5 rather than raising to the 5th power. Maybe that is just a formatting problem.

I hate the PEG. I think it is fairly useless. Your assumption that the final PE will equal 100*G is nonsensical. Why would that be true? What is so special about the number 100? The fact that it gives a final PE of 3.8 for Pfizer is practically reductio ad absurdum why this doesn't work. Pfizer usually has a PE or 20-30. It would never be below 6 let alone 3.8.

Also, where do bond rates enter your analysis? They don't. Your saying that stocks will be unaffected if you get the growth rates right and neglect bond rates going from 4% to 15%? You also neglect dividends.

The correct way to value stock is DCF however since you don't know the future growth rates it doesn't really matter. DCF gives you a good idea of what PEs are reasonable for a given amount of growth however you need to estimate all future growth, not just 5-year growth and put in bond rate assumptions (discount rates).

Mostly, I think valuation formulas are pretty useless. What you need to do is spend more time analyzing businesses in order to predict growth rates yourself rather than relying on others.