This table of high PEG and P/E growth stocks can give you a quick rundown of some potentially overvalued companies using these ratios.
It’s possible to filter your selection using the dropdown menus for the country, sector, and market cap so you can more granular comparisons.
For example, if you’d like to see a list of companies that have the highest P/E and PEG ratios in the financial sector, you can use this tool by selecting the appropriate menu item in the sector drop-down list.
With a MarketBeat subscription, you’ll also get access to seeing data for companies ranked by MarketRank, media sentiment, and analyst consensus.
Consider it as giving you a birds-eye view of companies to look out for before more rigorous analysis and due diligence takes place, as well as spotting companies with unusually high valuation ratios.
What are growth stocks?
Growth stocks are a type of stock that typically experience above-average growth in both their earnings and share price. They are often associated with newer, faster-growing companies but can also be found in more established businesses. Many investors believe that growth stocks have more upside potential than other types of stocks but also come with more risk.
Growth stocks tend to be more volatile than other types of stocks, and their share prices can fluctuate widely. This is because investors are often willing to pay higher prices for growth stocks in anticipation of future earnings growth. However, if a company's earnings growth does not meet expectations, its share price can drop sharply.
Growth stocks can be a good addition to any portfolio, but it's important to remember that they come with higher risks. When investing in growth stocks, it's important to do your homework and only invest in companies that you believe have a strong future.
What is the P/E ratio?
The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings. The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple. The P/E ratio is one of the most commonly used ratios by investors and analysts to determine whether a company's stock is over- or under-valued. The ratio is also used to compare the relative value of companies in the same industry.
The P/E ratio can be calculated by dividing a company's share price by its earnings per share (EPS). For example, if a company's stock price is $30 and its EPS is $3, then its P/E ratio would be 10 (i.e., $30/$3). The P/E ratio is often referred to as a "multiple" because it shows how much investors are willing to pay for each dollar of a company's earnings.
A high P/E ratio indicates that investors are willing to pay a high price for a company's shares relative to its earnings. This may be because they expect the company's earnings to grow in the future. A low P/E ratio indicates that investors are unwilling to pay as much for a company's shares relative to its earnings. This may be because they expect the company's earnings to grow slower or because they believe it is currently overvalued.
The P/E ratio is not a perfect measure and has several limitations. For example, it does not consider a company's debt-to-equity ratio or the fact that a company may have a large amount of cash on its balance sheet. However, the P/E ratio is still useful for investors and analysts to use in their valuation analysis.
What is the PEG ratio?
The PEG ratio (price-to-earnings-to-growth ratio) is an extension of the P/E ratio. When considering the company's growth rate, it is used to determine whether a stock is overvalued, undervalued, or fairly valued.
The P/E ratio calculates the stock's price-per-share by the company's earnings-per-share (EPS). For example, if a company's stock is trading at $30 per share and the company's EPS is $2.50, the company's P/E ratio would be 30 divided by 2.50, or 12. A P/E ratio of 12 means that the company's stock price is trading at 12 times the company's earnings.
The PEG ratio calculates the stock's price-per-share by the company's EPS growth rate. For example, if a company's stock is trading at $30 per share and the company's EPS is expected to grow at a rate of 20% per year, the company's PEG ratio would be 30 divided by 20, or 1.5. A PEG ratio of 1.5 means that the company's stock price is trading at 1.5 times the company's EPS growth rate.
Problems with the P/E and PEG ratios
The first issue is that the P/E ratio only considers the stock's current market price and not the intrinsic value. The intrinsic value is the true value of the company, based on its fundamentals. The market price may be higher or lower than the intrinsic value, and the P/E ratio will not tell you which is which.
The second issue is that the P/E ratio can be forward-looking based on future earnings estimates. These estimates can be very inaccurate, and the P/E ratio will not tell you how accurate they are.
The third issue is that the P/E ratio only considers the company's earnings, not the cash flow. The cash flow is the money that is actually available to the shareholders, and it can be very different from the earnings.
A better metric to use is the EV/EBITDA ratio. EV stands for enterprise value, which is the stock's market value plus the debt minus the cash. EBITDA stands for earnings before interest, taxes, depreciation, and amortization. This ratio is a better measure of the company's value because it considers the debt and the cash and is not forward-looking.
Another metric that is sometimes used is the P/FCF ratio. FCF stands for free cash flow, which is the cash flow available to the shareholders after all the expenses have been paid. This ratio is a good measure of the company's value, but it can be difficult to calculate.
How to invest in growth stocks?
There are a few things to look for when identifying a growth stock. One is a company with a history of strong earnings growth. Another is a company that is investing heavily in research and development, which can be a sign that they are preparing for future growth. Finally, a company with a strong brand and a loyal customer base is more likely to continue growing than one without these things.
Once you have identified a few potential growth stocks, it's important to do your own research. This includes reading financial reports, analyzing the company's competitive position, and speaking to analysts. Having a clear investment strategy and knowing your risk tolerance are also important.
If you're comfortable with a higher degree of risk, you may want to consider investing in small-cap growth stocks. These are stocks of companies with a market capitalization of less than $2 billion. Small-cap stocks tend to be more volatile than large-cap stocks, but they also offer the potential for higher returns.
Another option for growth investors is to invest in mutual funds or exchange-traded funds that focus on growth stocks. These can offer diversification and professional management, which can help to reduce risk.
Finally, it's important to remember that growth stocks can be volatile and don't always go up. Having a long-term perspective and being prepared for bumps in the road are important. If you're patient and disciplined, investing in growth stocks can be a great way to build your wealth over time.
How much to invest in growth stocks?
It depends on your investment goals and your risk tolerance.
If you're investing for the long term and you're willing to ride out the ups and downs, you may want to invest a larger portion of your portfolio in growth stocks.
On the other hand, if you're investing for the short term or are risk-averse, you may want to invest only a small portion of your portfolio in growth stocks.
The bottom line is that there's no right or wrong answer. It's up to you to decide how much to invest in growth stocks based on your individual circumstances.
Disadvantages of growth stocks
One of the biggest disadvantages of growth stocks is that they are often much more volatile than other types of stocks. This means that their prices can fluctuate a great deal in a short period of time, which can make them very risky investments.
Another downside to growth stocks is that they tend to be much more expensive than other types of stocks. This is because investors are willing to pay more for a stock that has the potential to grow a lot in value. As a result, if a growth stock does not perform as well as expected, it can be a very expensive mistake.
Finally, growth stocks can be difficult to sell. This is because there are often few buyers willing to pay the high prices that these stocks can command. As a result, investors may have to hold on to a growth stock for a long time in order to sell it at a profit.
Alternatives to growth stocks
Growth stocks are an attractive investment for many reasons. They offer the potential for high capital gains and are often associated with companies that are innovators in their industries.
On the other hand, value stocks offer a different kind of appeal. They tend to be less volatile than growth stocks and often provide a steadier source of income.
Value stocks can also be a good choice for investors who are looking for an alternative to growth stocks. Here are some reasons why:
- Value stocks tend to be less risky.
One of the main reasons why value stocks are an attractive investment is because they tend to be less risky than growth stocks.
Value stocks are typically well-established companies with a solid track record. They may not offer the same potential for high capital gains as growth stocks, but they are less likely to experience sharp declines in value.
- Value stocks can provide a steadier source of income.
Another reason to consider value stocks is that they can provide a steadier source of income than growth stocks.
Many value stocks pay dividends, providing investors with a regular income stream. On the other hand, growth stocks tend to reinvest their profits into the business, which can lead to more volatile earnings.
- Value stocks may be undervalued.
One of the main reasons why value stocks can be an attractive investment is because they may be undervalued by the market.
Value stocks tend to be overlooked by investors who are focused on growth. As a result, they may be trading at a discount to their intrinsic value.
- Value stocks can provide downside protection.
In a market downturn, value stocks can offer some downside protection.
While growth stocks tend to experience sharp declines in value, value stocks often hold up better. This is because investors are willing to pay a premium for companies with a solid track record and strong fundamentals
Value stocks can be a good alternative to growth stocks for many reasons. They tend to be less risky, they can provide a steadier source of income, and they may be undervalued by the market. Value stocks can be a good choice if you want a long-term investment.
MarketBeat All Access