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How to choose stock using PEG ratio |
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The PEG ratio compares a stock price/earning (P/E) to its expected EPS (Earning Per Share) growth. If a company’s stock has P/E 20, and its EPS is expected to grow 20%, then PEG will be 20/20 = 1. PEG equals one, means that it has fair value not undervalue nor overvalue.
PEG can help investor in finding low valued stock. If PEG lower than 1, it is possibly a sign of undervalued stock. In addition, if PEG is greater than 1, it might indicate that the stock is overvalued. Growth stock usually has PEG greater than 1 because it is expected to have high growth. Always remember to compare PEG and other ratio with other companies which are in the same industry and preferable the same size.
The hard thing when using PEG is getting the EPS growth. We can’t predict EPS growth accurately, although companies usually set the companies growth target. Anything can happened in the future, so PEG might be misleading.
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