“People are much more interested in the price-to-earnings-growth ratio (PEG) than they were five years ago,” says Grace Keeney Fey, portfolio manager at Boston-based Frontier Capital Advisors.
Indeed, the PEG ratio, calculated by dividing a stock’s estimated price-to-earnings multiple by its long-term growth estimate, is routinely discussed on several investment-oriented Web sites.
Why all the attention? By giving a sense of how a stock trades relative to its long-term growth potential, the PEG helps investors sniff out potential bargains among stocks that are richly valued on a price-to-earnings ratio (P/E) basis. Plus, there’s simplicity–a widely used rule of thumb says that a stock is undervalued if its PEG falls below one and overvalued if above one.
Given the market’s jumpiness over the past two months, Wall Street pros say that investors should pay extra attention to the quality of earnings estimates and growth forecasts when making decisions based on a PEG figure. “You have to be sure of those earnings,” says Fey, who adds, “You’re dealing with high-multiple stocks and, these days, there’s no mercy for disappointments.”
Full story at Forbes.com
