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Thanks for your thoughts. I'll have to get hold of those 5-year forecasts to do YPEGs, even if I have to pay for them.

The key to a lot of these variations seems to be estimating future margins. I'd like your opinion on a formula provided by Kenneth Fisher ('Super Stocks'). He claims that under good management the following is an estimate of long-term average potential profit:

Long-Term = .13 *(Market Share)Squared * (1+Ind Growth%)
Margin --------------------------------------------
(Mkt Share of Largest Competitor)

(The .13 is purely pragmatic.) I've had something of a hard time applying this, partly due to lack of market share data, and partly because companies with low market share get unreasonably low results. I would be willing to bet that some industries (retail, restaurants) are lower and some (software?) can be higher.

The advantage of this type of formula is that unlike the PEG, it can be used to value companies who are currently losing money, which is one place I often look for undervalued stocks.

Perhaps this is what those stock analysts are doing to come up with those 5-year forecasts. Having done numbers within large corporations for years, I never quite trust those projections. My experience is that the brokerage industry is usually behind the curve in anticipating turnarounds.

Any thoughts on this? Do you have a better method of estimating future margins?

Jack Neefus
College Park, MD
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