We all would like to invest in inexpensive but fast growing companies with a big future. The IBKR GlobalAnalyst is intended to get you there faster.
The unique feature of these searchable and sortable tables is that you can compare companies grouped by region or country or industry at current prices in the currency of your choice, vastly expanding your searchable universe.
Investors may use different metrics when looking for undervalued companies, such as Price to Earnings (PE) ratio or Return on Equity (ROE).
Another metric investors may use to compare stocks is the PEG ratio. “Fast growing companies at reasonable prices” is a relative concept. Let me explain.
We can compare companies by earnings relative to price, the PE ratio.
A = a 100 dollar stock that earns $3 per year has a PE ratio of 100/3 = 33.3
B = a 40 dollar stock that earns $4 per year has a PE ratio of 40/4=10.0
By this measure B provides a much better value than A because you pay much less for a dollar of earnings than with A.
Obviously, A should be growing much faster than B to be a better value.
But how much faster?
This is where the PEG or P/E/G ratio comes into play. We divide the PE by the % growth rate of the earnings. The PEG ratio, by definition, will be equal to 1 when the growth rate of earnings is equal to the PE ratio. As the growth rate of earnings increases above the PE ratio, the PEG ratio becomes smaller, and as growth goes lower, PEG becomes higher. Sell the stocks above a PEG of 1+ and buy the ones below 1-, could be a valid strategy. But there are two issues with relying on the growth rate:
If the PE and the growth rate are maintained, the stock price will rise by the growth rate. If you start looking for companies to buy with low PEG ratios or to sell companies with high ones, always make sure to look into the company. Look at future earnings projections by analysts1, look at regulatory filings, contact Investor relations to understand unusual data.
Look at the long term prospects of the industry; will it grow or shrink and how fast and how long? Look at the company’s competitive position within the industry. Adjust earnings growth estimates according to your data.2
It is discipline and careful data gathering that sets apart the winners from the losers.
Good Luck with IBKR GlobalAnalyst
Chairman and Founder
Interactive Brokers Group
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