The PEG ratio is best suited to stocks with little or no dividend
yield. Because the PEG ratio doesn’t incorporate income received by the
investor in its presentation of valuation, the metric may give unfairly
inaccurate results for a stock that pays a high dividend.
The problem with PEG is that risk and growth often go hand in glove – fast-growing firms tend to be riskier than average. This conflation of risk and growth is why PEG is frequently misused. When you use a PEG ratio alone to compare companies, you’re basically assuming that all growth is equal, generated with the same amount of capital and the same amount of risk.
However, firms that are able to generate growth with less capital should be more valuable, as should firms that take on less risk. If you look at a stock that is expected to grow at 15% trading at 15 times earnings and another one that is expected to grow at 15% trading at 25 times earnings, don’t just plunk your money down on the former because it has a lower PEG ratio. Look at the capital that each firm needs to invest to generate the expected growth, as well as the likelihood that those expectations will actually materialize, and you might very well wind up making a very different decision. But still, what PEG does give you is a quick and easy way to estimate the price you’re paying for future growth.
After study PEG few years ago, I tried to apply it but somehow I couldn’t attach to it. We should compare PEG of companies in a sector. I don’t have resources to calculate PEG for each company.
I knew some people worked out a simple table (for dummies) to interpret PEG like following. If you really understand the concept behind of PEG, the following table actually doesn’t make sense. I doubt Peter Lynch uses PEG in this way. May be this is for dummies.
I found this good article: http://www.fool.sg/2013/10/04/what-is-a-peg-ratio/
The problem with PEG is that risk and growth often go hand in glove – fast-growing firms tend to be riskier than average. This conflation of risk and growth is why PEG is frequently misused. When you use a PEG ratio alone to compare companies, you’re basically assuming that all growth is equal, generated with the same amount of capital and the same amount of risk.
However, firms that are able to generate growth with less capital should be more valuable, as should firms that take on less risk. If you look at a stock that is expected to grow at 15% trading at 15 times earnings and another one that is expected to grow at 15% trading at 25 times earnings, don’t just plunk your money down on the former because it has a lower PEG ratio. Look at the capital that each firm needs to invest to generate the expected growth, as well as the likelihood that those expectations will actually materialize, and you might very well wind up making a very different decision. But still, what PEG does give you is a quick and easy way to estimate the price you’re paying for future growth.
After study PEG few years ago, I tried to apply it but somehow I couldn’t attach to it. We should compare PEG of companies in a sector. I don’t have resources to calculate PEG for each company.
I knew some people worked out a simple table (for dummies) to interpret PEG like following. If you really understand the concept behind of PEG, the following table actually doesn’t make sense. I doubt Peter Lynch uses PEG in this way. May be this is for dummies.
| PEG | Valuation |
| < 0.5 | Undervalue |
| 0.5 – 1 | Fair Value |
| > 1 | Avoid/Sell |
| > 2 | Sell |
I found this good article: http://www.fool.sg/2013/10/04/what-is-a-peg-ratio/
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