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Stock Picks Bob's Advice
Tuesday, 17 April 2007
A Reader Writes 'What is a good PEG ratio?"

Hello Friends!  Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice!  As always, please remember that I am an amateur investor, so please remember to consult with your professional investment advisers prior to making any investment decisions based on information on this website.

Eric, who has been writing with different questions wrote earlier today.  He commented:

"What is a good PEG ratio? P/E ratio? What should a good EPS be and is this ratio even worth looking at?

Thanks,

Eric" 

Eric, thanks again for writing.  Before we can say what is a good ratio for the PEG ratio, let's review what it is.  The PEG ratio is the comparison between the P/E ratio and the Growth rate.  For the Yahoo numbers that I use, this is based on 5 yr expected earnings.  Thus, if the p/e is 10 and the growth rate is 5%/year, then the PEG would be 10/5 or 2.0.

In general, I have found PEG's between 1.0 and 1.5 to be reasonably priced.  the Motley Fool had a nice article on PEG ratios where it was pointed out:

2003 PEG Ratio

Number of Companies (1,316 total*)

Median Return

Average Return

Below 0.00

213

43.9%

69.4%

0.00 - 0.99

583

154.1%

225.2%

1.00 -1.50

193

78.4%

92.6%

1.51 - 2.00

102

60.5%

79.0%

More Than 2.00

225

44.4%

69.4%

*Includes U.S. companies trading on major exchanges with market caps greater than $500 million for which data was available.

Even from this chart we can see that there is a wide variation between PEG ratios and return on an investment.  Simply put, a stock with a low PEG ratio is in general a better "value" than one with a high PEG ratio.

Insofar as p/e ratios are concerned, here is another article you might wish to read.  Simply put, p/e's that are 'low' are better values than stocks with p/e's that are 'high'.  Each investor may have different tolerances to different p/e's.  As you invest and gain experience, examine these ratios, and observe how the stocks perform later.

Finally, what about EPS?  EPS just stands for "earnings per share".  This particular number is rather meaningless when taken out of context.  That is, it is important to know the price of a stock to determine what the value of the earnings is to the stockholder.  Also, it is the change in earnings that often determines the stock price.  And even more so, it is the expected earnings that will drive a stock higher or lower.  There isn't any particular absolute EPS on anything really.

I hope this helps a little.  Be sure and read some basic texts on investing to give you some more insight on all of these numbers.  Let me know how things are working out!

Bob 

 


Posted by bobsadviceforstocks at 11:23 PM CDT | Post Comment | Permalink

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