Stocks with the Best PEG Ratio
When you think of fundamental analysis, PEG ratios most likely don’t come to mind. The PEG ratio is a valuation indicator that provides a reasonable comparison basis in determining whether a stock is over or under valued. Calculated by dividing the Price/Earnings ratio by the expected growth rate, the ratio puts company’s future prospects on an equal footing. High growth companies are expected to have high P/E ratios, but comparing two companies that reveal differing ratios does not indicate the value of one stock over the other. For example, if stock A had a P/E of 20 and stock B had a P/E multiple of 30, you might jump to the conclusion that stock A presents the better value. If we add the consideration of growth to the equation, where stock A has an expected 10% growth rate and stock B has 30% growth, then we can put the two investments on equal footing with the peg ratio: Stock A revealing a value of 2 and Stock B indicating a value of 1. In this instance, stock A is clearly more overvalued than stock B using this metric.
Wikipedia notes an excerpt from the book One up on Wall Street, "The P/E ratio of any company that’s fairly priced will equal its growth rate". What this means is, as with our stock B example above, investments with a PEG ratio of 1, equal price multiple to growth expectation, would be considered to be fairly priced, with values less than this providing indication of undervaluation and greater than 1 indicating overvaluation.
One must always be weary that the denominator of this ratio is an expected number based upon analysts estimates, and therefore may be subject to varying viewpoints and opinions, and may not necessarily hold true to actual results.
What kind of ratios are currently being witnessed in the market?
Using PEG ratios obtained through Zacks, values range from –45.33 for Citigroup, which is having difficulties reporting a positive EPS, therefore turning the whole equation negative, to 60.92 for United States Steel, which has low to negative EPS, a high price, and low growth. Other notable companies with dismal PEG ratios include Electronic Arts which is seeing slowing growth prospects, and the New York Times that has shown profitability issues and dismal growth prospects when looking towards the future.
What stocks reveal the best PEG ratio?
Following are the top 20 stocks with the smallest, positive PEG ratios:
- Hartford Financial Services Group Inc (HIG) – PEG Ratio: 0.34
- Diamond Offshore Drilling Inc (DO) – PEG Ratio: 0.49
- SLM Corp (SLM) – PEG Ratio: 0.53
- Southwestern Energy Co (SWN) – PEG Ratio: 0.54
- ENSCO International PLC (ESV) – PEG Ratio: 0.57
- First Solar Inc (FSLR) – PEG Ratio: 0.57
- GameStop Corp (GME) – PEG Ratio: 0.59
- Genworth Financial Inc (GNW) – PEG Ratio: 0.64
- MetroPCS Communications Inc (PCS) – PEG Ratio: 0.65
- Allegheny Energy Inc (AYE) – PEG Ratio: 0.66
- Novellus Systems Inc (NVLS) – PEG Ratio: 0.68
- AFLAC Inc (AFL) – PEG Ratio: 0.69
- Humana Inc (HUM) – PEG Ratio: 0.69
- NASDAQ OMX Group Inc (NDAQ) – PEG Ratio: 0.69
- Hudson City Bancorp Inc (HCBK) – PEG Ratio: 0.7
- American International Group Inc (AIG) – PEG Ratio: 0.71
- ProLogis (PLD) – PEG Ratio: 0.72
- Western Digital Corp (WDC) – PEG Ratio: 0.72
- Apollo Group Inc (APOL) – PEG Ratio: 0.73
- Hewlett-Packard Co (HPQ) – PEG Ratio: 0.74
The list is primarily made up of stocks within the Technology, Energy and Financial space that have reasonable prospects for growth over the course of the economic recovery.
As always, be sure to perform your own due diligence prior to investing to properly educate yourself of all aspects of the investment’s valuation.
Stocks mentioned in this post: DO, ESV, HIG, SLM, SWN
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