Return to the PEG Ratio

Photo Credit: Tony & Wayne || Do we PEG the growth of pretty flowers?

Photo Credit: Tony & Wayne || Do we PEG the growth of pretty flowers?

I was looking through an article to see if it had any decent stock ideas, and noted that most of the companies featured were growth stocks.  As such, my first pass for analysis is the PEG ratio, which is the ratio of the Price-Earnings ratio divided by the growth rate expressed as a percentage (e.g. 8% => 8 for this calculation.).

I’ve written about the PEG ratio a long time ago, and it is a classic article of mine.  The PEG ratio is a valid concept for “growth at a reasonable” price investors.  It does not work well for value investors or aggressive growth investors.  My rule for implementation comes to this: if the current P/E ratio is 12 or higher and the PEG ratio is lower than 1.5, that stock might be worth a look.  Better to find the PEG ratio below one, though.

I went through the article and concluded that maybe Becton Dickinson and Hanesbrands might be worth a look.  But then I thought, “What if I applied the formula to propose overvalued stocks?”

I set my screener for a 2016 PE higher than 12 and a PEG higher than 2.0x, with failing momentum, where the stock was down more than 20% in the nine months prior to the current month.  Here were the 50 stocks that resulted:

What I find fascinating here is the mix of hot companies, basic materials and energy names, and limited partnerships.

This is only a start for analysis, so don’t run out and short these.  Not that I am big on shorting, but high earnings valuations, and failing price momentum could be a good place to start.  I have no positions in any of these companies, and I rarely if ever short.  I just thought this would be an interesting exercise.