Cheap stocks are great, but sometimes you get what you pay for. What's the use of a bargain-basement price-to-earnings ratio if the company can't grow? I have a long investment horizon and a high tolerance for risk, so I'm more interested in promising growth stocks than stodgy dividend machines.
To find stocks that satisfy my need for speed while also going on sale at a great price, I like to look at the PEG ratio. It's such a Foolishly useful metric that we've been known to call it the Fool Ratio. Divide the trailing P/E ratio of a stock by the estimated five-year earnings growth, and you have a neat little package representing the growth-adjusted value of the company. A fairly valued stock should land near the 1.0 mark. Higher numbers might indicate an overvalued security. A strong business with a low PEG ratio rocks!
Micron Technology
Here's how Micron stacks up against some of its closest competitors in the memory chip market:
|
Company |
Trailing P/E Ratio |
5-Year Earnings CAGR Forecast |
PEG Ratio |
|---|---|---|---|
|
Micron |
4.7 |
11.7% |
0.4 |
|
Rambus |
24.2 |
10.0% |
2.4 |
|
SanDisk |
10 |
14.3% |
0.7 |
Source: Yahoo! Finance. CAGR = compound annual growth rate.
Micron and its rivals are coming off a long and brutal price war that turned gross margins negative for a couple of years. There is no doubt in my mind that there's healthy growth ahead for all of these businesses, but there is also no question that Micron looks a whole lot more value-priced on a PEG basis than the others. SanDisk's 0.7 PEG ratio is nothing to sneeze at, though.
What to do next
As with all simple tools, the PEG ratio isn't a silver bullet to solve your portfolio's every quandary. It is, however, a great starting point for further research -- fellow Fool Joey Khattab has shown low PEG stocks beating the market in a 1,000-ticker sample. With a ludicrously low PEG ratio backed up by a strong business, I'd say that you should get to know Micron a little better. This stock rocks!
