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I've read a few articles recently that discuss the PEG (Price/Earnings to Growth) Ratio and how, when it's 1 or lower, it can mean that the company is undervalued, and thus a good investment (I know it's not a hard rule, just an indicator).

Although I understand that logic, I've noticed that it's very rare for large cap stocks (for instance, I didn't find any in the CAC 40). Most of those have PEG ratio way higher than that, yet, based on past performances, some seem like good investments.

I guess, since these stocks are watched by many eyes, as soon as the company is undervalued, many people buy shares and the PEG Ratio quickly gets to 1 and more.

So how useful is this ratio for large cap stocks? And what would be a good ratio (if any)?

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    Generally speaking no ratio in its entirety is enough to analyze a firm. You cannot take PEG as the only ratio to evaluate a firm. – DumbCoder May 27 '15 at 15:02
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    You do realize that you could use different estimates to get a different PEG, right? – JB King May 27 '15 at 15:56
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    @DumbCoder, yes I realize this. I'd just like to get a general idea of how to interpret the ratio for large cap stocks. – laurent May 27 '15 at 21:48
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    Perhaps it's worth asking whether there's such a thing as an undervalued large cap stock. – dg99 Jul 2 '15 at 15:08
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It is not so useful because you are applying it to large capital.

Think about Theory of Investment Value. It says that you must find undervalued stocks with whatever ratios and metrics.

Now think about the reality of a company. For example, if you are waiting KO (The Coca-Cola Company) to be undervalued for buying it, it might be a bad idea because KO is already an international well known company and KO sells its product almost everywhere...so there are not too many opportunities for growth.

Even if KO ratios and metrics says it's a good time to buy because it's undervalued, people might not invest on it because KO doesn't have the same potential to grow as 10 years ago. The best chance to grow is demographics.

You are better off either buying ETFs monthly for many years (10 minimum) OR find small-cap and mid-cap companies that have the potential to grow plus their ratios indicate they might be undervalued.

If you want your investment to work remember this: stock price growth is nothing more than

  1. People have a lot of expectations about the company's potential: think about RAVE (Rave Group Restaurants) is not generating earnings but it has Pie Five Pizza; good brand, good business model and it's getting famous.
  2. People have a lot of expectations about the company's potential company is doing very well, for example, Facebook.

You might ask yourself. What is your investment profile? Agressive? Speculative? Income? Dividends? Capital preservation?

If you want something not too risky: ETFs. And not waste too much time. If you want to get more returns, you have to take more risks: find small-cap and mid-companies that are worth.

I hope I helped you!

  • If you're going to buy and hold it isn't clear ETFs have any advantage over older-style mutual funds. The latter can be bought and sold without transaction fees if you deal directly with the companies running them. – keshlam Sep 9 '15 at 3:54
  • Might want to mark You are better off either buying ETFs monthly for many years (10 minimum) OR find small-cap and mid-cap companies that have the potential to grow plus their ratios indicate they might be undervalued. as opinion ;) Rest looks good. – Ross Sep 9 '15 at 13:16
  • Probably might want to add "In theory" or "You might be". Buying ETF's monthly or small/mid caps that have the potential to grow still might not beat out KO invested in the same manner of the same time frame. – Ross Sep 11 '15 at 20:33

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