Understanding a Stock’s PEG Ratio

A PEG ratio can’t be used alone but is a really powerful tool when integrated with the basics (price, volume and chart reading). You must enjoy crunching numbers and have a calculator handy to estimate your own PEG ratio. Access to quality statistical data from the internet such as past earnings and future earning estimates is vital to calculate this fundamental indicator. An assortment of websites produce a PEG ratio but I haven’t found one website which has a dependable PEG ratio I can use for my research, so I calculate it myself, ensuring accuracy with the last number.

I will use the definition from investopedia.com since it makes complete sense and does not get too confusing (below the definition is additional explanation and a current real-time instance, using Apple Computer).

The PEG Ratio:
“The PEG ratio compares a stock’s price/earnings (“P/E”) ratio to its expected EPS growth rate. If the PEG ratio is equal to one, it means the market is pricing the stock to fully reflect the stock’s EPS growth. This is”normal” in concept because, in a reasonable and efficient marketplace, the P/E is supposed to reflect a stock’s future earnings growth.

If the PEG ratio is greater than one, it indicates that the stock is possibly overvalued or that the market anticipates future EPS growth to be higher than what is currently in the Street consensus amount. Growth stocks typically have a PEG ratio greater than one because investors are willing to pay more for a stock that’s expected to grow quickly (otherwise known as”growth at any cost”). It might also be that the earnings forecasts are reduced while the stock price remains relatively stable for different factors.

If the PEG ratio is less than one, it’s a indication of a potentially undervalued stock or the market doesn’t expect the company to achieve the earnings growth that’s reflected from the Street estimates. Value stocks normally have a PEG ratio less than one since the stock’s earnings expectations have risen and the market hasn’t yet recognized the growth potential. On the other hand, it might also imply that earnings expectations have dropped faster than the Street could issue new predictions.