DJIA up 331 points on 28.11.07, see whether it can cross the 22 ma - 13278 pts for tonight trade(29/11)
Wednesday, November 28, 2007
PEG
Price/Earnings To Growth (PEG Ratio)
A ratio used to determine a stock's value while taking into account earnings growth. The calculation is as follows:
PEG is a widely used indicator of a stock's potential value. It is favored by many over the price/earnings ratio because it also accounts for growth. Similar to the P/E ratio, a lower PEG means that the stock is more undervalued.Keep in mind that the numbers used are projected and, therefore, can be less accurate. Also, there are many variations using earnings from different time periods (i.e. one year vs five year). Be sure to know the exact definition your source is using.
PEG rato = Price/Earning Ratio
Annual EPS Browth
How The PEG Ratio Can Help Investors
The PEG (price/earnings to growth) ratio is a tool that can help investors find undervalued stocks. It's not as well known as its cousins, the P/E and P/B ratios, but it is just as valuable. When used in conjunction with other ratios, it gives investors a perspective of how the market views a stock's growth potential in relation to EPS growth.
What the PEG Ratio IsThe PEG ratio compares a stock's price/earnings ("P/E") ratio to its expected EPS growth rate. If the PEG ratio is equal to one, it means that the market is pricing the stock to fully reflect the stock's EPS growth. This is "normal" in theory because, in a rational and efficient market, the P/E is supposed to reflect a stock's future earnings growth. If the PEG ratio is greater than one, it indicates that the stock is possibly overvalued or that the market expects future EPS growth to be greater than what is currently in the Street consensus number. Growth stocks typically have a PEG ratio greater than one because investors are willing to pay more for a stock that is expected to grow rapidly (otherwise known as "growth at any price"). It could also be that the earnings 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 possibly undervalued stock or that the market does not expect the company to achieve the earnings growth that is reflected in the Street estimates. Value stocks usually have a PEG ratio less than one because the stock's earnings expectations have risen and the market has not yet recognized the growth potential. On the other hand, it could also indicate that earnings expectations have fallen faster than the Street could issue new forecasts.It is important to note that the PEG ratio cannot be used in isolation. As with all financial ratios, investors using PEG ratios must also use additional information to get a clear perspective of the investment potential of a company. Investors must understand the company's operating trends, fundamentals and what the expected EPS growth rate reflects. Additionally, to determine if the stock is overvalued or undervalued, investors must analyze the company's P/E and PEG ratios in relation to its peer group and the overall market. The GE ExampleWe will use General Electric (GE) as a brief example. GE is currently trading at $31 per share and the Street consensus estimate for this year's (2002) EPS was $1.65. This earnings forecast represents 17% growth from the previous year's (2001) EPS of $1.41. The current P/E on 2002 estimated EPS is 18.8x ($31 divided by $1.65). This results in a PEG ratio of 1.11 (18.8 divided by 17). One interpretation of this PEG ratio being greater than one is that the stock retains its "growth" classification, despite the recent bad news surrounding GE, because it is still expected to outperform the rest of the market. Another hypothesis is that institutions are reluctant to sell because GE is considered a core holding and there is currently nothing to replace GE in their portfolios; however, a "normal" stock under normal circumstances would experience a more significant decline in the share price.
FREE Report: 7 Things Every Investor Must Know!The Investopedia Advisor analyst team wants to share with you 7 time tested tenets that they use to uncover market stomping stock ideas. This is a must-read report for anyone serious about controlling their financial destiny. Click here to access your FREE report online right now!A comparison of GE's PEG to other indexes shows that the market is not expecting much from GE. The current PEG ratio for the Dow Industrials is 1.30 and indicates that the market expects more out of the Dow index than from GE. The PEG ratio for the S&P 500 is 1.88 and reflects the market's continued demand for growth at any price.Based upon this limited analysis, we can conclude that, despite GE's current challenges, the stock still commands somewhat of a premium PEG ratio (1.10). The market, however, will pay more for the potential growth in the Dow (1.30) than for GE. We can also conclude that, despite the recent crash, the S&P 500 still commands top dollar (1.88) for each percentage of potential future earnings growth.Is GE undervalued or is it the last blue chip to succumb to a slow and painful death like Cisco's? Finding that answer requires more digging on your part.
-----------------------------------------
Move Over P/E, Make Way For The PEG
Updated March 27, 2007It is common practice for investors to use the price-to-earnings ratio (P/E ratio or price multiple) to determine if a company's stock price is over or undervalued. Companies with a high P/E ratio are typically growth stocks. However, their relatively high multiples do not necessarily mean their stocks are over priced and not good buys for the long term.
Let's take a closer look at what the P/E ratio tells us:
P/E Ratio =
Market Value per Share
Earnings per Share (EPS) There are two primary components here, the market value (price) of the stock and the earnings of the company. Earnings are very important to consider. After all, earnings represent profits, for what every business strives. Earnings are calculated by taking the hard figures into account: revenue, cost of goods sold (COGS), salaries, rent, etc. These are all important to the livelihood of a company. If the company isn't using its resources effectively it will not have positive earnings, and problems will eventually arise. Besides earnings, there are other factors that affect the value of a stock. For example:
Brand - The name of a product or company has value. Brands such as Proctor & Gamble are worth billions.
Human Capital - Now more than ever, a company's employees and their expertise are thought to add value to the company. It's about time!
Expectations - The stock market is forward looking. You buy a stock because of high expectations for strong profits, not because of past achievements.
Barriers To Entry - For a company to be successful in the long run, it must have strategies to keep competitors from entering the industry. Coca-Cola, for example, has built a very extensive distribution channel--anybody can make pop, but getting that product to the market like Coke does, is very costly. All these factors will affect a company's earnings growth rate. Because the P/E ratio uses past earnings (trailing twelve months), it gives a less accurate reflection of these growth potentials.The relationship between the price/earnings ratio and earnings growth tells a much more complete story than the P/E on its own. This is called the PEG ratio and is formulated as:
PEG Ratio =
Price/Earnings Ratio
Annual EPS Growth*
*The number used for annual growth rate can vary. It can be forward (predicted growth) or trailing, and either a one- to five-year time span. Check with the source providing the PEG ratio to see what kind of number they use. Looking at the value of PEG of companies is similar to looking at the P/E ratio: a lower PEG means that the stock is more undervalued. Comparative ValueLet's demonstrate the PEG ratio with an example. Say you are interested in buying stock in one of two companies. The first is a networking company with 20% annual growth in net income and a P/E ratio of 50. The second company is in the beer business. It has lower earnings growth at 10% and its P/E ratio is also relatively low at 15.
FREE Report: 7 Things Every Investor Must Know!The Investopedia Advisor analyst team wants to share with you 7 time tested tenets that they use to uncover market stomping stock ideas. This is a must-read report for anyone serious about controlling their financial destiny. Click here to access your FREE report online right now!Many investors justify the stock valuations of tech companies by relying on the assumption that these companies have enormous growth potential. Can we do the same in our example? Networking Company: P/E ratio (50) divided by the annual earnings growth rate (20) = PEG ratio of 2.5 Beer Company: P/E ratio (15) divided by the annual earnings growth rate (10) = PEG ratio of 1.5 The PEG ratio shows us the sexier high-tech company, compared to the beer company, doesn't have the growth rate to justify its higher P/E, and its stock price appears overvalued, particularly when this comparison is made.Take Google, for example, which provides us with an opposing angle of vision when applying the PEG ratio to its current pricing. Google's share price, since its IPO, has headed straight for the stratosphere. At time of writing it had a P/E of 47 and an expected earnings growth next year of 33%, which gives us a PEG of 1.40. The Nasdaq 100 Index a P/E of 30 and an estimated earnings growth rate of 15%, which produces a PEG of 2.0. Judging by the PEG ratio, Google is relatively undervalued compared to its pricier Nasdaq 100 benchmark. . ConclusionSubjecting the traditional P/E ratio to the impact of future earnings growth produces the more informative PEG ratio, which provides more insight about a stock's current valuation. By providing a forward-looking perspective, the PEG is a valuable evaluative tool for investors attempting to discern a stock's future prospects
A ratio used to determine a stock's value while taking into account earnings growth. The calculation is as follows:
PEG is a widely used indicator of a stock's potential value. It is favored by many over the price/earnings ratio because it also accounts for growth. Similar to the P/E ratio, a lower PEG means that the stock is more undervalued.Keep in mind that the numbers used are projected and, therefore, can be less accurate. Also, there are many variations using earnings from different time periods (i.e. one year vs five year). Be sure to know the exact definition your source is using.
PEG rato = Price/Earning Ratio
Annual EPS Browth
How The PEG Ratio Can Help Investors
The PEG (price/earnings to growth) ratio is a tool that can help investors find undervalued stocks. It's not as well known as its cousins, the P/E and P/B ratios, but it is just as valuable. When used in conjunction with other ratios, it gives investors a perspective of how the market views a stock's growth potential in relation to EPS growth.
What the PEG Ratio IsThe PEG ratio compares a stock's price/earnings ("P/E") ratio to its expected EPS growth rate. If the PEG ratio is equal to one, it means that the market is pricing the stock to fully reflect the stock's EPS growth. This is "normal" in theory because, in a rational and efficient market, the P/E is supposed to reflect a stock's future earnings growth. If the PEG ratio is greater than one, it indicates that the stock is possibly overvalued or that the market expects future EPS growth to be greater than what is currently in the Street consensus number. Growth stocks typically have a PEG ratio greater than one because investors are willing to pay more for a stock that is expected to grow rapidly (otherwise known as "growth at any price"). It could also be that the earnings 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 possibly undervalued stock or that the market does not expect the company to achieve the earnings growth that is reflected in the Street estimates. Value stocks usually have a PEG ratio less than one because the stock's earnings expectations have risen and the market has not yet recognized the growth potential. On the other hand, it could also indicate that earnings expectations have fallen faster than the Street could issue new forecasts.It is important to note that the PEG ratio cannot be used in isolation. As with all financial ratios, investors using PEG ratios must also use additional information to get a clear perspective of the investment potential of a company. Investors must understand the company's operating trends, fundamentals and what the expected EPS growth rate reflects. Additionally, to determine if the stock is overvalued or undervalued, investors must analyze the company's P/E and PEG ratios in relation to its peer group and the overall market. The GE ExampleWe will use General Electric (GE) as a brief example. GE is currently trading at $31 per share and the Street consensus estimate for this year's (2002) EPS was $1.65. This earnings forecast represents 17% growth from the previous year's (2001) EPS of $1.41. The current P/E on 2002 estimated EPS is 18.8x ($31 divided by $1.65). This results in a PEG ratio of 1.11 (18.8 divided by 17). One interpretation of this PEG ratio being greater than one is that the stock retains its "growth" classification, despite the recent bad news surrounding GE, because it is still expected to outperform the rest of the market. Another hypothesis is that institutions are reluctant to sell because GE is considered a core holding and there is currently nothing to replace GE in their portfolios; however, a "normal" stock under normal circumstances would experience a more significant decline in the share price.
FREE Report: 7 Things Every Investor Must Know!The Investopedia Advisor analyst team wants to share with you 7 time tested tenets that they use to uncover market stomping stock ideas. This is a must-read report for anyone serious about controlling their financial destiny. Click here to access your FREE report online right now!A comparison of GE's PEG to other indexes shows that the market is not expecting much from GE. The current PEG ratio for the Dow Industrials is 1.30 and indicates that the market expects more out of the Dow index than from GE. The PEG ratio for the S&P 500 is 1.88 and reflects the market's continued demand for growth at any price.Based upon this limited analysis, we can conclude that, despite GE's current challenges, the stock still commands somewhat of a premium PEG ratio (1.10). The market, however, will pay more for the potential growth in the Dow (1.30) than for GE. We can also conclude that, despite the recent crash, the S&P 500 still commands top dollar (1.88) for each percentage of potential future earnings growth.Is GE undervalued or is it the last blue chip to succumb to a slow and painful death like Cisco's? Finding that answer requires more digging on your part.
-----------------------------------------
Move Over P/E, Make Way For The PEG
Updated March 27, 2007It is common practice for investors to use the price-to-earnings ratio (P/E ratio or price multiple) to determine if a company's stock price is over or undervalued. Companies with a high P/E ratio are typically growth stocks. However, their relatively high multiples do not necessarily mean their stocks are over priced and not good buys for the long term.
Let's take a closer look at what the P/E ratio tells us:
P/E Ratio =
Market Value per Share
Earnings per Share (EPS) There are two primary components here, the market value (price) of the stock and the earnings of the company. Earnings are very important to consider. After all, earnings represent profits, for what every business strives. Earnings are calculated by taking the hard figures into account: revenue, cost of goods sold (COGS), salaries, rent, etc. These are all important to the livelihood of a company. If the company isn't using its resources effectively it will not have positive earnings, and problems will eventually arise. Besides earnings, there are other factors that affect the value of a stock. For example:
Brand - The name of a product or company has value. Brands such as Proctor & Gamble are worth billions.
Human Capital - Now more than ever, a company's employees and their expertise are thought to add value to the company. It's about time!
Expectations - The stock market is forward looking. You buy a stock because of high expectations for strong profits, not because of past achievements.
Barriers To Entry - For a company to be successful in the long run, it must have strategies to keep competitors from entering the industry. Coca-Cola, for example, has built a very extensive distribution channel--anybody can make pop, but getting that product to the market like Coke does, is very costly. All these factors will affect a company's earnings growth rate. Because the P/E ratio uses past earnings (trailing twelve months), it gives a less accurate reflection of these growth potentials.The relationship between the price/earnings ratio and earnings growth tells a much more complete story than the P/E on its own. This is called the PEG ratio and is formulated as:
PEG Ratio =
Price/Earnings Ratio
Annual EPS Growth*
*The number used for annual growth rate can vary. It can be forward (predicted growth) or trailing, and either a one- to five-year time span. Check with the source providing the PEG ratio to see what kind of number they use. Looking at the value of PEG of companies is similar to looking at the P/E ratio: a lower PEG means that the stock is more undervalued. Comparative ValueLet's demonstrate the PEG ratio with an example. Say you are interested in buying stock in one of two companies. The first is a networking company with 20% annual growth in net income and a P/E ratio of 50. The second company is in the beer business. It has lower earnings growth at 10% and its P/E ratio is also relatively low at 15.
FREE Report: 7 Things Every Investor Must Know!The Investopedia Advisor analyst team wants to share with you 7 time tested tenets that they use to uncover market stomping stock ideas. This is a must-read report for anyone serious about controlling their financial destiny. Click here to access your FREE report online right now!Many investors justify the stock valuations of tech companies by relying on the assumption that these companies have enormous growth potential. Can we do the same in our example? Networking Company: P/E ratio (50) divided by the annual earnings growth rate (20) = PEG ratio of 2.5 Beer Company: P/E ratio (15) divided by the annual earnings growth rate (10) = PEG ratio of 1.5 The PEG ratio shows us the sexier high-tech company, compared to the beer company, doesn't have the growth rate to justify its higher P/E, and its stock price appears overvalued, particularly when this comparison is made.Take Google, for example, which provides us with an opposing angle of vision when applying the PEG ratio to its current pricing. Google's share price, since its IPO, has headed straight for the stratosphere. At time of writing it had a P/E of 47 and an expected earnings growth next year of 33%, which gives us a PEG of 1.40. The Nasdaq 100 Index a P/E of 30 and an estimated earnings growth rate of 15%, which produces a PEG of 2.0. Judging by the PEG ratio, Google is relatively undervalued compared to its pricier Nasdaq 100 benchmark. . ConclusionSubjecting the traditional P/E ratio to the impact of future earnings growth produces the more informative PEG ratio, which provides more insight about a stock's current valuation. By providing a forward-looking perspective, the PEG is a valuable evaluative tool for investors attempting to discern a stock's future prospects
Subscribe to:
Posts (Atom)