A Peg ratio cannot be used alone but is a very considerable tool when integrated with the basics (price, volume and chart reading). You must enjoy crunching numbers and have a calculator handy to evaluation your own Peg ratio. access to ability statistical facts from the web such as past wage and time to come earning estimates is requisite to speculate this basic indicator. A range of websites produce a Peg ratio but I have not found one site that has a dependable Peg ratio that I can use for my own research, so I speculate it myself, ensuring accuracy with the final number.
I am going to use the definition from investopedia.com as it makes unblemished sense and doesn't get too confusing (below the definition is supplementary explanation and a current real time example, using Apple Computer).:
The Peg Ratio:
"The Peg ratio compares a stock's price/earnings ("P/E") ratio to its startling Eps increase rate. If the Peg ratio is equal to one, it means that the store is pricing the stock to fully reflect the stock's Eps growth. This is "normal" in theory because, in a rational and productive market, the P/E is supposed to reflect a stock's time to come wage growth.
If the Peg ratio is greater than one, it indicates that the stock is maybe overvalued or that the store expects time to come Eps increase to be greater than what is currently in the road consensus number. increase stocks typically have a Peg ratio greater than one because investors are willing to pay more for a stock that is startling to grow rapidly (otherwise known as "growth at any price"). It could also be that the wage forecasts have been lowered while the stock price remains relatively stable for other reasons.
If the Peg ratio is less than one, it is a sign of a maybe undervalued stock or that the store does not expect the company to perform the wage increase that is reflected in the road estimates. Value stocks ordinarily have a Peg ratio less than one because the stock's wage expectations have risen and the store has not yet recognized the increase potential. On the other hand, it could also indicate that wage expectations have fallen faster than the road could issue new forecasts."
- in case,granted by www.Investopedia.com
Peg Ratio Example:
Using Apple Computer Inc., I will demonstrate how to speculate the Peg ratio without relying on other websites.
First, you will need to accumulate the past wage numbers; going back at least 2 years and going transmit two years. (All data is from Thursday, June 23, 2005)
Aapl:
2003: 0.09
2004: 0.36
2005: 1.31 (E)
2006: 1.52 (E)
Now we need to speculate the increase from year to year.
Subtract the wage of 2004 by 2003 and then divide by 2003.
Repeat the process to decree the increase rate for the following years:
2004: (0.36-0.09)/0.09 x 100 = 300% increase rate
2005: (1.31-0.36)/0.36 x 100 = 264% increase rate
2006: (1.52-1.31)/1.31 x 100 = 16% increase rate
Now, take the current price (we will use the close from Thursday, June 23, 2005: .89) and divide it by 2004 wage and then by the 2004 increase rate:
2004: 38.89/ 0.36 / 300 = .36 Peg Ratio
2005: 38.89/ 1.31 / 264 = .11 Peg Ratio
2006: 38.89/ 1.52 / 16 = 1.59 Peg Ratio
Using the definition from above, Investopedia states that a stock is evenly valued at a Peg ratio of 1 in a rational and productive market. Please note that the stock store is not very rational or productive so we only use this estimate as a secondary indicator and tool, after our basic and technical prognosis is complete. Apple's Peg Ratio of 0.11 for 2005 was discounted into the price when these estimates first hit the street, giving us the big run-up late last year. Going forward, the stock's earning potential looks to slow considerably and the Peg ratio clearly shows us the vast jump in numbers from 2005 to 2006. A Peg ratio of 1.59 for 2006 is not the best rating going transmit but still under the red flag ratio of 2.00.
Finally, once you decree the Peg ratio of the stock you are seeing to buy, take the time to speculate the Peg ratio for the "sister stocks" in the manufactures group to see if they have higher or lower Peg ratios. Keep in mind, Peg ratios don't work for fellowships with negative or non-existent wage numbers.
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