PEG

Prior to our last meeting (10/22/08), Bob Salmon contacted me requesting an explanation of "PEG." This is a fundamental analysis statistic that was brought to our attention by Alanna McHugh and questions about it keep coming up. The purpose of this message to the blog is to offer my understanding of the statistic and its meaning when evaluating a stock for possible purchase (along with the usual CANSLIM criteria and proper price/volume evaluation). If my explanation is off base, please reply to the blog.

PEG
PE is defined as the current price of the stock ($) divided by the current annual earning ($, trailing 4 quarters). PEG, in turn, is defined as the PE divided by the earnings growth rate. PEG is a readily available statistic on most financial web sites (for example, Yahoo Finance\ticker\key statistics (on left under Company).

In IBD’s Daily Graphs Online (premium service) PEG is not given in the data boxes of either the daily or weekly charts. However, EPS Growth Rate and PE are given and therefore the PEG can be calculated there from. IBD’s “EPS Growth Rate” is calculated using earnings data over trailing quarters and over a period of NLT 3 years and NMT 5 years.

What does the PEG statistic mean???? For a high PE stock (relative to the average PE of all S&P 500 stocks) a PEG of 2.0 or less means that the current price of the stock (usually high) is justified. Conversely, a high PE stock with a PEG of greater than 2.0 means that the current price is too high in terms of its earnings history.