How to Find Stocks to Invest in Using the PEG Ratio

A stock's PEG ratio compares its P/E ratio and expected profit growth.

A stock's PEG ratio compares its P/E ratio and expected profit growth.

The price-to-earnings, or P/E, ratio is a common metric investors use to value stocks. It reveals what the market is willing to pay for each dollar of the company’s profit. The price-to-earnings-growth, or PEG, ratio takes it a step further. It tells you how the market values the stock compared to the company’s expected annual profit growth. In general, the lower the PEG ratio, the better. Stocks with PEG ratios of less than 1 are considered cheaper than those with PEG ratios of greater than 1. To find stocks with low PEG ratios, you can use an online stock screener, which finds stocks based on specific criteria.

Visit any financial website that provides a stock screener. Find the PEG ratio parameter among the screener’s search criteria. This parameter is often listed under “Valuation Ratios” or a similarly named section.

Select a maximum PEG ratio of 1 on the ratio’s parameter settings. This instructs the screener to find stocks with a PEG ratio of less than or equal to 1. Each stock screener is different. You might have to choose from pre-selected settings, such as “Under 1,” instead of choosing an individual minimum and maximum ratio.

Choose a minimum PEG ratio of 0 if this option is available. This tells the screener to leave off any stocks with negative PEG ratios. A negative ratio indicates a stock has negative earnings per share or a negative expected profit growth rate. Either of these can lead to a bad investment.

Click “Find Stocks,” “Run Screen” or a similar button on the screener, if necessary, to generate a list of stocks with your selected range of PEG ratios. In this example, the ratios are between 0 and 1. The screener displays one stock per row and lists each company’s name, the stock’s ticker symbol and the stock’s PEG ratio in columns.

Click the PEG ratio column heading to sort the list so that the stocks with the lowest PEG ratios appear at the top. These stocks have a low price relative to the rate that the company’s profits are expected grow. For example, assume a stock has a PEG ratio of 0.5. This means the price the market is willing to pay for each dollar of the company’s profit is half the rate at which those profits are expected to grow per year. In other words, the stock’s a potential bargain.

Click a stock’s ticker symbol of capital letters or the company’s name to view more information about the stock and to assess its potential as an investment.

Tip

  • The PEG ratio doesn’t tell you whether a stock will be a winner or a loser. It just helps you weed out those that might be too expensive and provides a starting point for further research. Always review a company’s financial information before investing.
 

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