As an investor, I am constantly asking myself this question: “where exactly are we in the market cycle right now?”
Today, I would be sharing one of the indicator that i am using: Price/Earnings to Growth Ratio (PEG).
Quote from Wikipedia:
PEG ratio is a stock’s price-to-earnings (P/E) ratio divided by the growth rate of its earnings for a specified time period. The PEG ratio is used to determine a stock’s value while taking the company’s earnings growth into account, and is considered to provide a more complete picture than the P/E ratio
When PEG ratio is >1.5, it indicates that the stock is “Overvalued”
When PEG ratio is <1.5, it indicates that the stock is “Undervalued”
PEG ratio is useful as it take into consideration of the growth of the company. This indicator is generally more comprehensive than Price Earnings ratio (PE Ratio).
Below is a screenshot taken from Finviz as on date on the PEG ratio of various industry.
- Technology – mostly overvalued
- Services – Mixture of both
- Basic Materials – mostly Undervalued
- Financial – mostly undervalued
- Consumer goods and health care – mostly overvalued
- Industrial Goods – Mixture of both
- Utilities – mostly Overvalued
Note: For Investors/Traders
The below macro view on PEG has to be used in conjunction of Technical analysis & Fundamental analysis.