Hello,
I had a question regarding over/ undervalued. i am looking at the PEG ratio ( Kaplan book 3 SS 12 pg 206).
Where PEG = (P/E)/g -------- lower the better.
lets say
Company A PEG: 2
Peer Company PEG: 3
Why would a company A with a lower PEG be undervalued compared to its peers? wouldn’t it be overvalued, since lower the rato the better?
No, it would be undervalued because the company is expected to grow more relative to it’s P/E valuation when compared to its peers. This means the P/E is lower when taking growth into account, and the company is undervalued. If the company has a PEg of 4 then the growth would either be lower or the P/E would be higher than the peers and the market would be giving the company more credit for its expected growth than its peers have, making it overvalued from a relative perspective.