It is a known fact that most of the Investors go with PE Ratio as their Primary Determination of Under-Valued stocks.
But in reality PE Ratio alone is not enough!
We need to check the EPS Growth Rate also to ensure the Low PE is really worth for Investing.
Here comes the PEG Ratio for our help.
Price to Earnings Growth Ratio formula is given below.
Lower the Better!
Company A with PE 10 with EPS Growth 10% the PEG = 1
Company B with PE 20 with EPS Growth 50% the PEG = 0.4
Here the Company B is better to invest as PEG is lower even though Company A having lower PE
You can use the Range below for determining the Buy, Hold, Sell ranges.
BUY If PEG < 1
HOLD If PEG between 1 and 2
SELL IF PEG > 2
How PEG Goes Down?
PEG Goes down if:
- EPS Growth Increases (due to higher sales eg: boom)
- Price decreases (due to bear market sentiments)
How PEG Goes Up?
PEG Goes up if:
- EPS Growth Decreases (due to lower sales eg: recession)
- Price increases (due to bull market hype)
This is one Tool which is used by Celebrity Investors & Mutual Funds to exit their stocks.
Remember, Cera was sold by well-known Celebrity Investor during 2016 because the PEG was getting higher than 2 due to the EPS Growth declines.
How to Calculate the EPS Growth?
You can take the EPS of current year & EPS of previous year to Find the Growth %.
(You can also add one more past year & take the Average too)
Experiment what you Learn
Now you can Experiment on what you Learned.
Here is one Exercise from our Facebook Group.
You can click below link to Join the Group & Put your Answer as Comment there.
Our Subscription 3 Year 30 Stocks are PEG Compatible!
Learn more on Intrinsic Value here.