From the The Infirmary forum at StockCentral.com, Joe Magnan writes:


When I looked at the TSSW Back form for Genentech (DNA) it showed the following table for the forcasted PE's


Avg half or majority of lowest HighPEs       =  FcstHighPE 30.0
 Avg half or majority of the lowest Low PEs =  FcstLowPE 16.0

 Avg of the Forecast High and Low PEs      =  FcstAvg PE 23.0  


However, I was not able to come up with these values when using the Value
table at the top of the form. When I looked at Microsoft I was able to
come up with the same calculations as Take Stock. Why are the forcast
figures for DNA so far from the actual PE values in the Value table?

This is explained as follows:

Take Stock use average of majority high/low PE for calculating forecast PE. Yet it gives it a condition:
If forecast High PE > 30,set forecast low PE to (forecast low PE * (30/forecast high PE) and limit forecast high PE to 30 .

Ellis can give you a further explanation on this.

Sally

Joe: At 03:42 PM 1/3/2008, you wrote:

> From the The Infirmary forum at StockCentral.com, Joe Magnan writes:
>That works out great! Thank you. I am looking forward to the
>explanation from Ellis as to why.

Well, there you have it. I looked at the numbers themselves and didn't go any further to see if those rules were applied. And Sally came up with the explanation as to WHAT was being done. If you're looking for an explanation as to why I designed it that way, here it is.

This product, in the desktop form, has an advanced mode that permits the user, when she is confident and knowledgeable to override the judgments provided by the program in the novice mode. Unfortunately, we have yet to see the advanced mode programmed into the on-line version. So everyone is stuck with the default judgments. Of necessity, the judgments applied for the novice are very conservative.

We have put a program out there for public use and do not want to risk any liability for people who fail to take responsibility for their actions and might wish to blame us for their mistakes. Those judgments, frankly, are the same as I use in my own studies because I happen to be conservative as well. But they are reasonable and they are intended to give values that are sustainable and comfortable?the two attributes I value highly when making my estimates of growth and PEs. I hope we will soon have the advanced version available to StockCentral members. I've been told to expect it around next summer. Does this give you the answer you were looking for?

ET

Joe:

At 02:24 PM 1/4/2008, you wrote:

>I am very comfortable with the conservative aproach built into Take
>Stock. I understand the need to cap the high PE forecast to maintain a
>certain amount of realism. Where I am having difficulty is in
>understanding the logic on the formula to reduce the forecast low PE.
>Please excuse my ignorance, I am new to the fundamental side, up to
>now I have mostly used technical analysis.
 

We needed a mechanism that would produce a reasonable but moderate result. It seemed to me a rational approach to look at the relationship between the high and low PE before the high was capped at 30 and to reduce the low PE to the same relationship to the capped PE.

We also looked at the prospect of using a PEG ratio of 1 for the low PE. However, in practice, looking at the results, it seemed to me that the choice we made was the better and more rational one.

The low PE is our means of arriving at a potential low price. We look at the lowest earnings we might expect and the lowest multiple of those earnings people might be expected to pay in the future, based on their historical practice (and moderated to be comfortable and sustainable).

By providing us with a mechanism with which we can consistently come up with the future price range, we then make the Upside/Downside Ratio much more useful than simply as a measure of "risk." We use the U/D ratio to assess how our evaluation of the company's quality and worth stacks up to "the herd's." If we have overvalued it compared to what the herd thinks, we come up with a low U/D ratio, which is an alarm that prompts us to go back and challenge our assumptions by which we came up with the quality judgments.

I hope that helps some more. You might want to read my book, Take Stock: A Roadmap to Profiting from you First Walk Down Wall Street. I pretty much cover all of this there.

ET