"A reader inquires about PEG ratios, and Short-Interest"

Hello Friends! I really enjoy getting an email with a good question. First of all, I am an amateur investor myself, but I will try to answer any question the best I can.

Brian L. writes: "Here's my first question. On Feb 27th you give an overview of shuffle master (SHFL). You talked about outstanding shares and floating shares with a relationship to shares out short, What is this telling us about the stock and if this a short term indication how short? Also you talk about PEG being high or you will say, "It's only" what number is the middle of the road or neutral? Take care"

Indeed, on 2/27/04, (just two days ago), I posted SHFL on this website. Most of my statistics come from the "Key Statistics" on Yahoo.com.

First question, what about the "short interest." For me, this is a number which gives me two bits of information, 1) if this is high...more than a day or two of trading volume...then this may be an opportunity to benefit from a short 'squeeze'. That is, if the price rises on good news, the stock may head higher quickly as short-sellers look to cover their positions. In the case of SHFL, we can see that the short ratio is 26.925, with 5.71 million shares out short or 37.80% of the float. This actually, per Yahoo, expanded from December 2003, by about 500,000 shares. 2) However, a word of caution, short sellers are not completely ignorant either, and maybe there is information out there on a stock that is potentially damaging....so a short interest this high also must make one a bit cautious...sort of going against the trend.

I went on the web to see if I could get anything else. Best I could find was a definition on investorwords.com, which stated that: "Short interest divided by average daily volume over some period, usually 30 days. Some investors believe that a high ratio is a bullish indicator, and a low ratio is a bearish indicator." As we look at stocks, it is just one more factor that we should consider...and maybe we can all get a better feel for what will happen with the stock price in the near future!

Next you asked about the PEG ratio. I usually pick this up also from Yahoo.com. The PEG is a measure of valuation that is more informative than the standard P/E ratio. The P/E is a static number indicating the current price over the trailing earnings. If a company is expected to grow quickly in the future, it may indeed be reasonable to pay a higher P/E if the growth is coming soon. This is how the P/E ratio is developed. This is somewhere along the lines of GARP...not the "World According to..." but "Growth At a Reasonable Price."

What PEG is reasonable? Tough call. Certainly PEG ratios near one or under are quite reasonably priced. This suggests that the p/e and the growth rate are fairly in synch. If you are paying over a 2.0 PEG then you are certainly paying a premium for the growth, in my opinion. That doesn't mean that a low PEG will guarantee that a stock will rise or that a high PEG means the opposite...but just another factor to get a feel for the valuation of an investment. I try to keep my analysis a little 'eclectic' if that is the right word (!), meaning I don't want to be truly JUST a growth investor, or a value investor, but more along the lines of growth at a reasonable price I guess!

Again, looking on the Web, I found a nice explanation from the Motley Fool website.

I hope that this discussion is helpful for you! I really DO enjoy getting emails and questions from people who read what I write. It is my sincere wish to be informative. But remember, I am NOT an investment advisor and I am learning along with you about all of these investment ideas!

Regards again,

Bob