PEG, Shiller CAPE & the Cyclically-Adjusted View

PEG — P/E per unit of growth

PEG = P/E ÷ annual EPS growth rate (e.g., P/E 30 with 30% growth = PEG 1.0). The folk rule: PEG ≈ 1 is "fair," < 0.7 interesting, > 2 expensive. Its flaw: it extrapolates a growth RATE that may not persist — garbage growth-in, garbage valuation-out. Use it to compare SIMILAR companies, not as an absolute verdict.

Shiller CAPE — the cycle-proof P/E

CAPE = price ÷ 10-year AVERAGE inflation-adjusted earnings. By averaging a full cycle it stops cyclicals from looking cheap at peaks and beaten-downs from looking expensive at troughs. At index level it is the best-known long-horizon valuation gauge (high CAPE historically → low 10-year forward returns). At single-stock level it needs the company to survive a decade.

Which to use when

Snapshot (stable earner): trailing P/E. Grower: PEG vs peers. Cyclical or index: CAPE-style averaging. The meta-skill is matching the multiple to the earnings SHAPE — the single biggest valuation error is using one ratio everywhere.

Sources

• PEG RatioInvestopedia
• Cyclically Adjusted P/E (CAPE)Investopedia / Robert Shiller