Not only is it one of Steely Dan's best known songs, but it's also a handy tool for equity investors. We're talking about PEG, shorthand for the price-to-earnings growth ratio, one of the many ways analysts measure a stock's value. As with price-to-earnings (p-e) ratios, lower numbers are better, and show whether the stock is trading at a discount or premium to its potential earnings growth.
The PEG ratio, which has gained popularity in recent years, is a useful tool for investors who employ the "growth at a reasonable price" style. It's one of the best ratios to use in the screening process because it combines both growth and value characteristics. Its components are three of the most important characteristics of determining whether a stock should be purchased: price, earnings, and the growth of the earnings.
To get a PEG ratio, a stock's p-e ratio is divided by its year-over-year earnings growth rate. In general, a stock with a PEG figure below 1.0 is considered attractively valued. It suggests that investors are putting a lower price on the company's stock than they should based on its earnings prospects.
In this week's screen, we searched for stocks trading at the lowest positive PEG ratios in their sector (negative values were excluded). One name for each of the 10 sectors that make up the Standard & Poor's 1500 index is represented:
Sector
Company (Ticker)
Price (11/29/07)
Consumer Discretionary
Live Nation (LYV)
$13.61
Consumer Staples
Nash Finch (NAFC)
$34.55
Energy
Atwood Oceanics (ATW)
$84.08
Financials
Franklin Bank Corp. (FBTX)
$4.22
Health Care
WellCare Health Plans (WCG)
$40.10
Industrials
AirTran Holdings (AAI)
$8.22
Information Technology
Smith Micro Software (SMSI)
$7.74
Materials
Freeport-McMoRan Copper & Gold (FCX)
$96.61
Telecom Services
Telephone & Data Systems (TDS)
$62.78
Utilities
Dynegy (DYN)
$7.59