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Pegging

1. The practice of fixing the exchange rate of a currency to the value of another currency. Most countries that peg their currencies do so to the U.S. dollar, though some peg to currency baskets. See also: Fixed exchange rate.

2. The act of buying a security in a large quantity to drive up the price. Writers of put options (and holders of short positions) practice pegging when the expiration date is approaching and it appears that the option will be exercised such that it puts the writer at a disadvantage. The idea behind pegging is to cause the price to rise so the option is not exercised and the writer can profit from the premium.

Price/Earnings-to-Growth Ratio

A ratio of a stock's valuation, that is, how expensive a stock is relative to its earnings and expected growth. It is calculated as:

PEG = Price/Earnings/Annual Earnings Growth per Share

A lower ratio indicates a less expensive stock with higher earnings and growth, while a higher ratio indicates the opposite. According to Peter Lynch, who popularized the ratio, a fairly priced stock has a ratio of 1.

peg

1. To fix the price of a new security issue during the issuance period through buying and selling it in the open market in order to ensure that the price in the secondary market will not fall below the offering price. Also called holding the market, price stabilization, stabilize. See also stabilization period.
2. To fix the rate at which foreign currencies exchange with one another.

Price/earnings-to-growth ratio (PEG).

To find a stock's PEG ratio, you divide the stock's price-to-earnings ratio (P/E) by its projected annual earnings per share (EPS) growth. The result is a rule-of-thumb assessment of whether the stock is overvalued or undervalued.

In brief, if a stock has a PEG ratio of 1, you conclude that investors are paying what the stock is worth based on its P/E and growth potential. If it is higher than 1 -- say 1.55 -- you conclude that investors are paying more than the growth projection justifies. If it is less than 1, you conclude that the stock may be poised to appreciate in value and so a wise purchase.

However, a PEG ratio, by itself, does not provide an adequate basis for an investment decision, any more than a P/E does, because it doesn't take company fundamentals into account. For example, an under-priced stock may be a good buy, but it may also be the sign of a company in poor financial shape or an industry in trouble.

The potentially greater problem is that growth projections, even when they are the consensus finds of professional analysts, are just estimates. That is especially true of estimates that look out five or more years, since there is no way to anticipate the shifting marketplace with real precision. Yet projections based on a single-year's results are notoriously inaccurate.

In short, a PEG ration can be a valuable addition to an investor's toolkit, provided you understand the assumptions on which its components and results are based.

References in periodicals archive ?
Off-the-peg and design-your- own rugs are available at each of Maskreys stores in Cardiff, Newport and Bristol.
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The steel mesh is a standard off-the-peg product, applied in an off-the-wall way.
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So I can't buy off-the-peg dresses" - Joan Collins, pictured.
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Off the peg brides MONSOON offers brides-to-be the chance to buy dresses off-the-peg - for a fraction of designer prices.
The off-the-peg number is none other than the whistle and flute worn by Peter Reid the night Sunderland beat Newcastle 2-1 at St James' Park, effectively ending Ruud Gullit's stint as manager.
But Roger Edwards's off-the-peg excuse one night last December fell on deaf ears, if only because the frilly satin collection in the carrier bag between his legs was still attached to its hangers.
Swan Hunter bought an off-the-peg Dutch design when it bid in 1999 to build the ships.
"Some women like off-the-peg designs and some women want a dress that has been especially made for them.
"I'd never ever have considered doing anything like this before I lost all my weight, but I'm thrilled to be able to slip into this size 12 off-the-peg dress."