Chicago, IL – November 3, 2009- Kevin Matras explains the PEG Ratio and how to use it for finding undervalued companies. Stocks in this week’s article include Bucyrus International, Inc. (NASDAQ: BUCY), DeVry Inc. (NYSE: DV), Inverness Medical Innovations, Inc. (NYSE: IMA), OSI Systems, Inc. (NASDAQ: OSIS) and Scholastic Corp. (NASDAQ: SCHL). Click here for the full story exclusively on Zacks.com: http://at.zacks.com/?id=5528

Screen of the Week written by Kevin Matras of Zacks Investment Research:

This week, I’m going to focus on a simple strategy that uses the PEG Ratio for determining a company’s under- or overvaluation.

Let’s first start with a definition.

A PEG ratio is simply the:

 

P/E Ratio divided by the Growth Rate

A value of 1 or less is considered good (at par or undervalued), while a value of greater than 1 is, in general, not as good (overvalued).

Once again, the PEG Ratio is simply the P/E Ratio divided by the Growth Rate. Many believe this ratio tells a more complete story than just the P/E.

A company with a P/E Ratio of 25 and a Growth Rate of 20 would have a PEG Ratio of 1.25 (25 / 20 = 1.25).

While a company with a P/E Ratio of 40 and a Growth Rate of 50 would have a PEG Ratio of 0.8.

Traditionally, investors would look at the stock with the lower P/E Ratio and deem it a bargain (undervalued). But looking at it closer, you can see it doesn’t have the growth rate to justify its P/E.

The stock with the P/E of 40, though, is actually the better bargain since its PEG Ratio is lower (0.8), implying it’s undervalued with more potential value. (Undervalued in relation to its projected growth rate.)

In other words, the lower the PEG, the better the value, because the investor would be paying less for each unit of earnings growth.

So for this week’s screen, we’re going to use the PEG ratio to find value.

Let’s first start with:

 

  • Zacks Rank less than or equal to 2
    (Only stocks with a Zacks Rank of Strong Buy or Buy get through.)

     

  • Average Broker Rating less than or equal to 2.5
    (The brokers too have to be on board as well. Only companies in the better part of a Strong Buy or Buy are allowed.)

     

  • Projected One Year Growth Rate >= 20
    (Strong performers are what we’re looking for.)

     

  • PEG Ratio less than 1
    (P/E using F(1) divided by its F(1) projected growth rate.) (We’re using a classic, text book example to identify undervalued stocks.)

     

  • Price >= $5

     

Here are 5 stocks from this week’s list (for Tuesday, 11/3/09):

BUCY Bucyrus International, Inc.
DV DeVry Inc.
IMA Inverness Medical Innovations, Inc.
OSIS OSI Systems, Inc.
SCHL Scholastic Corp.

Sign up now for your 2-week free trial to the Research Wizard and get the rest of the stocks on this list and start using this screen in your own trading. Or create your own strategies and test them first before you invest. Know what to buy and when to sell. Get started with your free trial today: http://at.zacks.com/?id=5529

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

About Screen of the Week

Zacks.com created the first and best screening system on the web earning the distinction as the “#1 site for screening stocks” by Money Magazine. But powerful screening tools is just the start. That is why Zacks created the Screen of the Week to highlight profitable stock picking strategies that investors can actively use. Each week, Zacks Profit from the Pros free email newsletter shares a new screening strategy. Learn more about it here http://at.zacks.com/?id=5530

About Zacks

Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it’s your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit from the Pros http://at.zacks.com/?id=5531

Follow us on Twitter: http://twitter.com/zacksresearch

Join us on Facebook: http://www.facebook.com/home.php#/pages/Zacks-Investment-Research/57553657748?ref=ts

Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.

Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.

Disclaimer: Past performance does not guarantee future results. Investors should always research companies and securities before making any investments. Nothing herein should be construed as an offer or solicitation to buy or sell any security.

Contact: Jim Giaquinto
Company: Zacks.com
Phone: 312-265-9268
Email: pr@zacks.com
Visit: www.Zacks.com

Zacks Investment Research