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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » PEG Ratio Nails Down Value Stocks

PEG Ratio Nails Down Value Stocks

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1PEG Ratio Nails Down Value Stocks Empty PEG Ratio Nails Down Value Stocks Sat Jul 26, 2014 10:09 am

Sstar

Sstar
Vice President - Equity Analytics
Vice President - Equity Analytics
A stock's price/earnings to growth (PEG) ratio may not be the first metrics that jump to mind when due diligence or stock analysis is discussed, but most would agree that the PEG ratio gives a more complete picture of stock valuation than simply viewing the price-earnings (P/E) ratio in isolation.

The PEG ratio is calculated easily and represents the ratio of the P/E to the expected future earnings growth rate of the company. This article will discuss the positive attributes of the metric, how to best use it in your research and what to watch out for when using it.

Determining a Stock's Value
Common stocks represent a claim to future earnings. The rate at which a company will grow its earnings going forward is one of the largest factors in determining a stock's intrinsic value. That future growth rate represents everyday market prices in stock markets around the world.

The P/E ratio shows us how much shares are worth compared to past earnings. Most will use 12-month trailing earnings to calculate the bottom part of the P/E ratio. Inferences may be made by looking at the P/E ratio; for instance, high P/E ratios represent growth stocks, while low ones highlight value oriented stocks. (For more insight, read Understanding The P/E Ratio.)

Example - Calculating the PEG
Let\'s look at two hypothetical stocks to see how the PEG ratio is calculated:
ABC Industries has a P/E of 20 times earnings. The consensus of all the analysts covering the stock is that ABC has an anticipated earnings growth of 12% over the next five years.

20 (x times earnings) / 12 (n % anticipated earnings growth) = 20/12 = 1.66
XYZ Micro is a young company with a P/E of 30 times earnings. Analysts conclude that the company has an anticipated earnings growth of 40% over the next five years.
30 (x times earnings) / 40 (n % anticipated earnings growth) = 30/40 = 0.75

What the PEG Ratio Tells Us
Using the examples above, the PEG ratio tells us that ABC Industries stock price is higher than its earnings growth. This means that if the company doesn't grow at a faster rate, the stock price will decrease. XYZ Micro's PEG ratio of 0.75 tells us that the company's stock is undervalued, which means it's trading in line with the growth rate and the stock price will increase.

Stock theory suggests that the stock market should assign a PEG ratio of one to every stock. This would represent theoretical equilibrium between the market value of a stock and anticipated earnings growth. For example, a stock with an earnings multiple of 20 and 20% anticipated earnings growth would have a PEG ratio of one. (To learn more, see Introduction To Fundamental Analysis.)

PEG ratio results greater than one suggest one of the following:

Market expectation of growth is higher than consensus estimates.
Stock is currently overvalued due to heightened demand for shares.
PEG ratio results of less than one suggest one of the following:

-Markets are underestimating growth and the stock is undervalued.
-Analysts' consensus estimates are currently set too low.
-A great feature of the PEG ratio is that by bringing future growth expectations into the mix, we can compare the relative valuations of different industries that may have very different prevailing P/E ratios. This makes it easier to compare different industries, which tend to each have their own historical P/E ranges.

http://www.investopedia.com/articles/analyst/043002.asp

2PEG Ratio Nails Down Value Stocks Empty Re: PEG Ratio Nails Down Value Stocks Sat Jul 26, 2014 10:19 am

VALUEPICK

VALUEPICK
Expert
Expert
I like peg ratio. If we select an industry we should have idea and estimation on important variables (factors) relevant to industry. So we can get some ideas about growth in the sector and company that we want to follow. I am sure you must have done some peg analysis on REXP. Their next the most important psychological barrier is Rs.100/-. Good luck!

3PEG Ratio Nails Down Value Stocks Empty Re: PEG Ratio Nails Down Value Stocks Sat Jul 26, 2014 10:24 am

Sstar

Sstar
Vice President - Equity Analytics
Vice President - Equity Analytics
PER/(growth rate)+(dividends yield)

REXP <1

4PEG Ratio Nails Down Value Stocks Empty Re: PEG Ratio Nails Down Value Stocks Wed Jan 28, 2015 10:21 am

Quibit


Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
I would use this method to nail value stocks stocks.

5PEG Ratio Nails Down Value Stocks Empty Re: PEG Ratio Nails Down Value Stocks Wed Jan 28, 2015 9:27 pm

VALUEPICK

VALUEPICK
Expert
Expert
@Quibit wrote:I would use this method to nail value stocks stocks.
It is a good idea. However irrespective of ratios there will be demand for new stocks from new investors and traders.

6PEG Ratio Nails Down Value Stocks Empty Re: PEG Ratio Nails Down Value Stocks Wed Jan 28, 2015 9:32 pm

VALUEPICK

VALUEPICK
Expert
Expert
Rexp is trading around Rs, 154 now. It is time to go behind stocks trading below the net asset value, below the market P/E ratio, value stocks and peg based stocks. We find these types of stocks in the plantations sector, food and poultry sector and production sector etc.

7PEG Ratio Nails Down Value Stocks Empty Re: PEG Ratio Nails Down Value Stocks Sat Mar 28, 2015 12:15 am

Quibit


Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
Nail down your stocks.

8PEG Ratio Nails Down Value Stocks Empty Re: PEG Ratio Nails Down Value Stocks Fri Jul 24, 2015 12:08 pm

VALUEPICK

VALUEPICK
Expert
Expert
The PEG ratio gives a more complete picture of stock valuation than simply following the P/E ratio in isolation.

9PEG Ratio Nails Down Value Stocks Empty Re: PEG Ratio Nails Down Value Stocks Wed Oct 14, 2015 11:20 am

VALUEPICK

VALUEPICK
Expert
Expert
It is time to target higher earning growth companies.
It is time to target higher earning growth companies.

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