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I like your idea of applying the PEG concept to operating earnings rather than net income. Operating income is normally more stable, and therefore, more predictable, than net income. It would also include some companies with recent net losses, which would broaden the range of stocks that you can apply a PEG to.

However, if you attempted this, it would seem that you would need a new yardstick--.50 would no longer be a buy signal. Worse, you would need to adjust for the difference between net income and operating income. This would include differences in SG&A, debt ratio, and all sorts of things that vary from company to company. So comparison across companies, which is kind of the point of a PEG, would be much more difficult.

What about the following variation: use trailing EPS based on net income (as it's done today), but use growth in operating income as the growth %? This might be more reliable than growth in net income, which tends to jump around a lot.

Jack Neefus
College Park, MD
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