WHAT ARE WE LOOKING FOR?
Today, let's look at the stocks trading at the greatest price-to-earnings growth, or PEG, discounts. We'll use Thomson ONE's Stock Reports Plus, a Thomson Reuters' portfolio management tool used by institutional investors.
WHAT'S A PEG RATIO?
A stock's PEG ratio tells investors how much they are paying for a stock's earnings growth. The PEG is calculated by taking the price-to-earnings ratio and dividing it by the annual earnings growth. If a company's P/E is 20, then the earnings would have to be growing at 20 per cent for the PEG ratio to be 1. If the P/E is 10, then the PEG is 0.5. If the P/E is 40, then the PEG is 2. A lower ratio means the stock is cheaper.
Today we'll use the forward PEG, which uses earnings estimates for the next 12 months to calculate the P/E and expected earnings growth rate.
WHAT DID WE FIND OUT?
A lot of value-oriented investors will look for stocks with PEGs of less than 1.0. That means, for instance, that for a stock with a PEG of less than 1.0 they're paying less than 10 times earnings for growth of 10 per cent. There are plenty of names here with PEGs of less than 1.0 to begin more research on. Note that some of the mining names might be tricky. Their PEs and PEGs can be meaningless at times, such as when large new mines come on stream, followed by large jumps in profits.