While PEG ratios are supposed to improve the use of P/E ratios by adjusting it with future growth, it fails to make any adjustments for risks as potential source of differences in valuation.
It is called the P/E to growth ratio, or simply PEG ratio.
The perfect peg Stocks with PEG ratios of less than 1 are considered undervalued relative to their EPS growth rates, whereas those with ratios of more than 1 are considered overvalued.
Though most analysts calculate the PEG ratio by using forecasted earnings, Lynch prefers the conservative approach.
Arak and Foster (2003) develop some implications for the PEG ratio to explain the observed high PE and PEG ratios during the late 1990s.
According to Sturm, several unpublished studies from Wall Street have cited a significant relationship between PEG ratios and growth-stock performance.
PEG ratios are not the only buy sign, but they are important, says Monica Walker, co-manager of the Lou Holland Growth fund (LHGFX), which also follows a GARP strategy.
When looking at PEG ratios, investors should keep in mind that earnings growth estimates are just that--estimates.
10) This model supports the use of the
PEG ratio as a means of ranking stocks--higher
PEG ratios imply that the market expects a lower rate of return.
Lynch, according to Tracy, also seeks companies with
PEG ratios under 1.
We have a preference for companies with below average price/earnings ratios, below average price to cash flow ratios, below average
PEG ratios (that's price/earnings to growth rate) for their sectors, but not necessarily deep value.
It is a compelling buying opportunity, when you can pay a
PEG ratio of 1 or below for a good franchise company like First Union.
