Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
Global Economic Tensions Translate Into Oil Price Volatility - 22nd May 19
The Coming Pension Crisis Is So Big That It’s a Problem for Everyone - 22nd May 19
Crude Oil, Hot Stocks, and Currencies – Markets III - 22nd May 19
The No.1 Energy Stock for 2019 - 22nd May 19
Brexit Party and Lib-Dems Pull Further Away from Labour and Tories in Latest Opinion Polls - 22nd May 19
The Deep State vs Donald Trump - US vs Them Part 2 - 21st May 19
Deep State & Financial Powers Worry about Alternative Currencies - 21st May 19
Gold’s Exciting Boredom - 21st May 19
Trade War Fears Again, Will Stocks Resume the Downtrend? - 21st May 19
Buffett Mistake Costs Him $4.3 Billion This Year—Here’s What Every Investor Can Learn from It - 21st May 19
Dow Stock Market Trend Forecast 2019 May Update - Video - 20th May 19
A Brief History of Financial Entropy - 20th May 19
Gold, MMT, Fiat Money Inflation In France - 20th May 19
WAR - Us versus Them Narrative - 20th May 19
US - Iran War Safe-haven Reasons to Own Gold - 20th May 19
How long does Google have to reference a website? - 20th May 19
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19
It’s Not Technology but the Fed That Is Taking Away Jobs - 16th May 19
Learn to Protect your Forex Trading Capital - 16th May 19
Gold Ratio Charts Offer The Keys to the Bull Market - 16th May 19
Is Someone Secretly Smashing the Stock Market at Night? - 16th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

Investor Education - What's the PEG Ratio ?

InvestorEducation / Investing Nov 27, 2006 - 01:42 PM GMT

By: Shahla_Walayat

InvestorEducation

The Market Oracle is starting off a series of educational articles with the Price Earnings Growth (PEG) Ratio. The PEG ratio compares a companies price/earnings (PE) ratio to its expected Earnings per share (EPS) growth rate

Investor Education - What's the Peg Ratio ?


Taking Google as an example

  • Share Price $505
  • This years EPS is $10.3 (est 2006), divided by NEXT years earnings estimate is 13.7 which represents a 33% growth in earnings (13.7/10.3).
  • Therefore the Peg ratio is calculated as
  • PE = 505 /10.3 = 49
  • Peg Ratio = 49/33% = 1.48

This would suggest that Google is learning towards being expensive, which supports recent MarketOracle analysis on Google.

(Also note many sources suggest comparing this years earnings to last years, that is WRONG, to arrive at the PEG you should compare NEXT years earnings to this years).

How to use the Peg Ratio ?
If the Peg ratio is greater than 1, then this usually suggests that the stock is overvalued as the market is expecting faster future growth. On the other hand if the Peg Ratio is less than 1 then this suggests that the stock is undervalued. Therefore In general, the lower the PEG ratio, the better the value, because the investor would be paying less for each unit of earnings growth.

  • <0.5 =Strong Buy
  • 0.5 to 1 = Buy
  • 1.0 to 1.25 = Hold
  • 1.25 to 2 = Over valued
  • 2+ = SELL

PEG ratio's should not be used in isolation to other indicators, such as price charts, and compare to the Peg ratio of similar stocks i.e. picking the cheapest stock in the best sector. Also note that growth stocks tend to have PE ratios >1.

Many sources of market data readily calculate the Peg ratio and provide extensive FREE financial information on stocks such http://www.ADVFN.com , (under the company information tab), some of which we will cover in future articles. Remember the PEG ratios is P/E divided by Expected growth (Next year EPS/Cur year EPS).

For now go through your portfolio, create an excel spreadsheet and list the the PEG ratio for each stock and see if they are under or overvalued. How have they performed relative to their market sector ? The peg should give a clue on performance. Also look for stocks that have low PEGs for further analysis. Again the PEG is not to be used on its own.

Shahla Walayat

(c) MarketOracle.co.uk 2005-2006

Disclaimer - This Article / Analysis is provided for general information purposes only and not a solicitation or recommendation to enter into any market position, and you are reminded to seek independent professional advice before entering into any investments or trading positions.
The Market Oracle is a FREE Financial Markets Forecasting & Analysis online publication. We aim to cut through the noise cluttering traditional sources of market analysis and get to the key points of where the markets are at and where they are expected to move to next
! http://www.marketoracle.co.uk

This article maybe reproduced if reprinted in its entirety with links to http://www.marketoracle.co.uk


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments


28 Nov 06, 21:15
Re: Investor Education - What's the PEG Ratio ?
Thankyou very much for that !

Very enlightening, I will definetly incorporate the PEG ratio into my stock selection strategy and look forward to many more such like articles


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules