My favorite fundamental indicator, the PEG ratio, shows small-cap stocks are a buy.
The indicator compares a stock’s price-to-earnings (P/E) ratio to its earnings growth rate. This simple calculation converts the popular P/E ratio to a meaningful data point.
The problem with the P/E ratio is that different stocks should have different ratios. But many investors use a static value to determine whether a stock is overvalued or undervalued.
A popular strategy is to buy a stock when the P/E ratio is below 15 or some other value. That rule ignores the fact that some stocks deserve higher valuations than others.
The PEG ratio addresses this problem.
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