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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 ?
IN STORE: Kate Fearnley is moving all of her off-the-peg stock to a new concession area in Psyche on Linthorpe Road, Middlesbrough.
TO celebrate 10 years in the industry, Middlesbrough fashion designer Kate Fearnley is charging 2002 prices for all her off-the-peg designs - including those from her current collection - this week only.
COAST is the latest store to join the battle for off-the-peg wedding dresses.
The practice is working on a major housing development in Cambridge and plans to incorporate off-the-peg brass cladding panels (developed by copper specialists KME) in a six-storey apartment block.
The off-the-peg sector has really taken off, but I've also shown that independent stores can prosper.
It's easy to do if you use off-the-peg fence posts and trellis panels plus a few odd lengths of timber.
While Sarah Macauley chose a chic off-the-peg designer dress and coat, the Chancellor chose a suit by one of Marks & Spencer's favourite tailors.
It's for people who would normally buy an off-the-peg suit but want different options," says Moss Bros's senior buyer Simon Sowden.
Off the peg brides MONSOON offers brides-to-be the chance to buy dresses off-the-peg - for a fraction of designer prices.
However Duncan believes that the domination of the off-the-peg suit will continue.
The steel mesh is a standard off-the-peg product, applied in an off-the-wall way.
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.