by John Jagerson
Usually value investors are looking for stocks with low value multiples or ratios. While there are many of these, probably the most popular version is the P/E or Stock Price to Earnings ratio. The drawback to a P/E ratio is that it does not account for growth. A low P/E may seem good but if the company is not growing, its stock's value is also not likely to rise.
The P/E ratio can be enhanced by including growth and turning it into the PEG ratio. A PEG ratio is calculated by dividing the stock's P/E ratio by its expected 12 month growth rate.
One of the most notable proponents of this analysis was Peter Lynch (of Fidelity Investments fame) who suggested that a fairly valued stock will have a growth rate roughly equal to its P/E ratio.
That means that a fairly valued stock will have a PEG ratio of 1. A lower PEG ratio may indicate a good value and a PEG ratio much greater than one could indicate that a stock is overvalued.
One of the most notable proponents of this analysis was Peter Lynch (of Fidelity Investments fame) who suggested that a fairly valued stock will have a growth rate roughly equal to its P/E ratio.
That means that a fairly valued stock will have a PEG ratio of 1. A lower PEG ratio may indicate a good value and a PEG ratio much greater than one could indicate that a stock is overvalued.
Fundamentally speaking, the PEG ratio is more than it appears. In one ratio you have established that the company has profits, growth expectations and a reasonable stock price relative to its financial performance. These are not always givens in today's stock market. Using some minimal fundamental screening within a well diversified portfolio is a great way to remove some volatility from your own portfolio's equity curve.
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