The PEG ratio is a great tool for examining the value of a stock and a great addition to the P/E ratio. The PEG ratio takes the current P/E ratio and divides it by the forecasted growth of the company. The closer the PEG ratio is to 0 without being negative the better. A PEG ratio of 1 shows us that the stock is trading at a fair price compared to the forecasted earnings. A PEG ratio between 0 and 1 means the stock is undervalued and anything over 1 means the stock is overvalued.
Wikipedia PEG Definition
Investopedia PEG Definition

Yahoo Finance has been the best place we have found to find the PEG ratio for different stocks. To get the PEG ratio from Yahoo Finance you will need to enter the ticker symbol and then click on Key statistics, located in the left bar. Here is a link for the key statistics for Apple Inc (AAPL). To change to another stock, just enter the new ticker in the right symbol field.

We have found the PEG ratio to be a great tool for valuing growing companies. Here is an article that shows the average stock returns from 2003 for different PEG ratios. Even though the PEG ratio is a great tool, it doesn’t tell us the whole story. The main downfall of the PEG ratio is that the growth is estimated. The estimated growth of the company is almost guaranteed to change with changes in the company and in the economy. Here is an article that talks about the downside of the PEG ratio.

The Market Flavor opinion is that the PEG ratio is a great tool for valuing growing companies, but it needs to be considered along with many other tools and factors. The PEG ratio should only be a piece of the puzzle when you are looking at a stock. We still believe that strong companies that are well positioned for growth in the future should be the basis for picking stocks. The PEG ratio should help you value those strong stocks.

Tags:   Learn How to Invest   PE Ratio   PEG ratio  

Posted on April 24, 2007 2:16 PM | Digg | del.icio.us