Stocks: The Power of PEG

Large-cap companies with a below-market p-e-to-growth ratio may be just the ticket for value investors. S&P's latest screen found eight top-ranked examples

Value investors may want to get to know PEG a little better. A low PEG could mean good value for investors.

The PEG ratio (aka the p-e-to-growth measure) is a very valuable, and often overlooked, metric for determining the relative attractiveness of a stock. A simple definition of PEG is the price-earnings ratio divided by the three-year compounded annual growth rate.

"We view the price-to-growth (PEG) ratio as a helpful metric for looking at a stock's valuation in the context of a multiyear (typically three or five years) earnings growth outlook," explains Steve Biggar, managing director of global equity research for Standard & Poor's.

We though we'd put PEG to work in this week's screen. We looked for large-cap (S&P 500 members), dividend-paying stocks that were classified as value stocks in S&P's database. The stocks also had to have Standard & Poor's investment rankings of 4 STARS (buy) or 5 STARS (stong buy). S&P equity analysts expect those stocks to outperform the broader market on a total return basis over the next 12 months, and to rise in price on an absolute basis.

And then we took care of the PEG part. Each of the stocks had to have a PEG ratio lower than that of the current average of 1.3 for the S&P 500.

When we finished the screen, eight names turned up:

Company Ticker S&P STARS Rank
Bristol-Myers Squibb BMY 4
El Paso Corp. EP 4
Honeywell International HON 4
OfficeMax OMX 4
PerkinElmer PKI 4
PNC Financial Services PNC 4
Prudential Financial PRU 4
Textron TXT 4
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