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!

ITT Educational Services (NYSE: ESI) is sporting a way-low PEG ratio of 0.38 today. The bottom line is expected to grow by about 15% a year over the next five years, and the stock is trading at a ridiculous 5.5 times trailing earnings.

Here's how ITT stacks up against some of its closest competitors in the for-profit postsecondary education market:


Trailing P/E Ratio

5-Year Earnings CAGR Forecast

PEG Ratio





Corinthian Colleges (Nasdaq: COCO)




Apollo Group (Nasdaq: APOL)




DeVry (NYSE: DV)




New Oriental Education & Technology Group (NYSE: EDU)




Source: Yahoo! Finance. CAGR = compound annual growth rate.

Education isn't exactly a high-growth market, as the flow of freshmen looking for a school is rather constant. But the entire sector is trading at deeply discounted rates, which makes up for the lack of exciting growth to some degree. ITT investors are accustomed to single-digit P/E ratios, but today's valuation seems ludicrous, even so. We're only three years removed from a time when ITT occasionally traded at more than 30 times trailing earnings, and analysts clearly expect better growth from here on out than what the P/E ratio would indicate.

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 proven business model and industry-leading margins, I'd say that you should get to know ITT Educational Services a little better. This stock rocks!

Fool contributor Anders Bylund holds no position in any of the companies discussed here. Apollo Group is a Motley Fool Inside Value recommendation. New Oriental Education & Technology Group is a Motley Fool Rule Breakers pick. Try any of our Foolish newsletter services free for 30 days. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.