The PEG Ratio

Stock Valuation The PEG Ratio, short for price-to-earnings to growth ratio is a quick short hand of figuring out which stocks are possibly undervalued. The current conditions make for very elevated levels of market valuation of most equities except for a couple of sectors (commodities and energy). In searching for undervalued stocks, looking at the PEG ratio may provide you with a clue.

The PEG Ratio

A stock’s PEG ratio is simply the Price-to-Earnings ratio divided by the (expected) earnings growth rate. Note that technically, PEG ratio can indicate “forward PEG” or “trailing PEG”. Since we are only concerned about the future earnings for new investment dollars, it is a good idea to look at the forward PEG ratio in evaluating stocks. The lower the PEG ratio, the more undervalued a stock is. A rule of thumb used in the industry to evaluate stocks is looking for a number less than 1 – indicating that a stock is possibly undervalued. The PEG ratio provides a better picture than simply looking at the P/E of a stock. For e.g., you may choose to use a screener and exclude high P/E stocks, say anything over 20. This may not be the best course of action, as the high P/E might be justified if the company is expected to grow its earnings aggressively over the next few years.

Click here for a short video from Investopedia explaining PEG ratio.

My current holdings have two companies with a low PEG ratio of < 1, and are possibly undervalued (ADM and MG.TO).

Company

Ticker Price-to-Earnings 5-yr Exp Growth Rate PEG Ratio

Agrium

AGU.TO 20.69 5% 3.43

Apple

AAPL 18.45 11.34% 1.36

Archer Daniels Midland

ADM 18.28 18.8% 0.91

Bank of Nova Scotia

BNS.TO 11.97 10.23% 1.24

BCE Inc

BCE.TO 17.87 5% 3.33

Chevron Corp

CVX 10.60 5.75% 1.97

Cineplex Inc

CGX.TO 42.85 5.3% 8

General Electric Company

GE 20.53 7.58% 2.12

IAMGold Corp

IMG.TO NA 3% 8.49

Inter Pipeline Ltd

IPL.TO 31.79 1.82% 17.6

Johnson & Johnson

JNJ 17.75 6.47% 2.77

Kinder Morgan Inc

KMI 35.50 9% 3.76

Magna International Inc

MG.TO 13.11 15.5% 0.9

Medtronic Inc

MDT 25.46 6.84% 2.63

Omega Healthcare Investors Inc

OHI 22.59 2% 6.62

Qualcomm Inc

QCOM 25.54 10.75% 1.29

Realty Income Corp

O 47.23 5.55% 3.22

RioCan REIT

REI.UN.TO 11.2 2.5% 4.4

The Jean Coutu Group Inc

PJC.A.TO 23.02 8.2% 2.8

Thomson Reuters

TRI.TO 89.94 13% 1.58

Wells Fargo & Co

WFC 13.30 9.38% 1.39

Note that the PEG ratio is a quick overview and a shorthand at evaluating stocks. Make sure to do your due diligence before investing in any company.

Do you use the PEG ratio in your valuation? Share your thoughts below.

 Image Credit: freedigitalphotos.net/winnond

12 thoughts on “The PEG Ratio

  1. Thanks for the writeup! I typically focus on metrics that help me decide if the dividend is sustainable (payout ratios, ffo, debt levels). I don’t spend a lot of time looking into growth rates. Although, now that I think about it, that is pretty stupid of me.

    I dislike the PE ratio in general and have a tendency to gloss over (or ignore) metrics that use it.

    Thanks for the info!

    • ILG,
      Looking at the fundamentals is always a good idea. But I think we tend to focus on a few metrics and ignore some others. I decided to write this down to bring it to the attention of some investors on a place to look. But at the end of day, estimates are really just that – merely estimates. No one knows what the future holds and has to be taken with a grain of salt.

      cheers
      R2R

  2. Earlier in the year I looked into using the PEG ratio in my stock analyses. However, the more I read, it seemed the metric was best used for growth companies (the Amazons, Netflix, Googles, etc.) of the world over dividend stocks. I think it can be helpful, especially for lower yield dividend stocks since the company’s valuation is more focused on growth than income. However, since I focus solely on dividend growth stocks, I decided not to add the metric in my analysis of a stock.

    Thanks for the information though on the ratio. It is always a great idea to see if there are other metrics out there that can add a key piece of informatino to a stock analysis.

    Bert, One of the Dividend Diplomats

    • Hmmm thanks for the input. I see what you mean about using the metric more for growth companies. I dont use it as a tell-all and is only just another piece of the puzzle in figuring out where things stand. For example, if you look at the pipelines, the PEG ratios dont make any sense, yet they are valued fairly in the current market. So, caution has to be used where its due for the metric.

      Thanks for sharing your thoughts.
      R2R

  3. Hi R2R. I use PEG sometimes, but usually as a secondary indicator. Also, I mainly look at a company’s PEG ONLY if it is a steady and consistent grower. I think an investor has a reasonable chance of extrapolating the growth of such companies. As for the volatile “high growth” companies, they aren’t my style anyway…..but I really don’t want to go out on a limb and predict future growth.

    On the whole I think a company’s PE and PEG aren’t worth much on their own……they are only an instantaneous snapshot of the company. If they are used with other metrics however, they can be useful.

    Looking to buy any shares in the next week? Have a great week.
    -Bryan

    • Some very good and valid points, Bryan. Thanks for sharing your thoughts. I dont use PEG religiously, but something that I just glance at when I evaluate companies. Good to know how everyone else uses each metric and how much it means to each one. I see what you mean about using long term earnings estimate for growth companies and I think it makes sense. Hadnt thought about it as I dont really invest in them.

      No more buys for now. I am all out. Cash positions are measly right now. Are you planning any buys?
      Thanks for stopping by and the input.
      R2R

  4. R2R, good post, thanks! As someone new to investing outside of indexes, I’m still learning about what to look at; 52 week average, BETA, P/E, dividend, etc. I do not really look much into a companies financials, mostly because the companies I’ve mostly invested in are big name companies that are dividend aristocrats. On the outliers, I’ll do a little more due diligence, but I’m still learning. So thanks for giving me something else to look into.

    – HMB

    • HMB,
      Glad to bring it your attention. Like the comments above, there are pros and cons to using the metric and its not a tell-all. Keep in mind that it should just be a small piece in the puzzle and simply because a company has the number appearing awry, doesnt mean its a bad company. In short: exercise caution when using it 🙂 I personally use it occasionally and take a quick glance at the metric from time to time.
      R2R

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