Markets & Finance

A Small PEG to Hang Your Hat On


From Standard & Poor's Equity Research

One of the many ways analysts measure a stock's value is the PEG ratio, or price-to-earnings growth. As in p-e (price-to-earnings) ratios, lower numbers are better, and show whether the stock is trading at a discount or premium to its potential earnings growth. Sticking with stocks trading at a discount could provide more bang for your buck.

As I describe in my book, The Standard & Poor's Guide to Selecting Stocks (McGraw-Hill), the PEG ratio has become more widely used in recent years. It's a terrific ratio for investors who employ the "growth at a reasonable price" style.

This is one of the best ratios to use in the screening process because it combines both growth and value characteristics. Its components are three of the most important characteristics of determining whether a stock should be purchased: price, earnings, and the growth of the earnings.

LOOK AT HISTORY. To get a PEG ratio, a stock's p-e ratio is divided by its year-over-year earnings growth rate. In general, a stock with a PEG figure below 1.0 is considered attractively valued. It suggests that investors are putting a lower price on the company's stock than they should based on its earnings prospects.

Because PEG ratios vary by industry, it's a good idea to compare similar companies. And if you want to dig deeper, find a company's historical PEG ratio to see how the current PEG stacks up.

That brings us to this week's screen. We searched for stocks trading at the lowest PEG ratios in their sector. One name for each of S&P's 10 GICS (Global Industry Classification System) sectors is represented.

The screen required a market capitalization above $5 billion, and at least four analysts providing coverage this year.

Here are the 10 stocks we found.

10 Stocks with Small PEGs


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