10 growth stocks with low PEG

In our search for Quality Growth companies we use various metrics. One of them is the PEG (Price Earnings to Growth) ratio, a financial metric used to evaluate the value of a stock in relation to its projected growth rate. It takes the company’s expected growth into account, providing a more detailed analysis of whether a stock is over or undervalued.

We will provide an explanation on how to interpret this ratio and present 10 companies with an EPS (Earnings Per Share) growth above 15% and a PEG ratio below 1. A PEG ratio below 1 indicaties undervaluation, ideal for investors seeking value-based growth opportunities. Important to note is that a shortlist of potential opportunities needs further rigorous analysis to check for more quality indicators.

Key components of the PEG Ratio:

P/E Ratio:
The Price-to-Earnings (P/E) ratio is a fundamental metric used to value companies by comparing their stock price to their earnings per share (EPS).

• A higher P/E ratio suggests investors expect higher earnings growth in the future. Growth companies often have higher P/E ratios.

• A lower P/E ratio might indicate a company is undervalued, or that investors expect lower growth or higher risk.

• The “normal” P/E ratio varies significantly by industry. Tech companies might have P/E ratios over 30, while mature industries like utilities might have P/E ratios under 15.

There are two main types:

• Trailing P/E: Uses the past 12 months of actual earnings

• Forward P/E: Uses projected earnings for the next 12 months

Earnings Growth Rate:
Earnings growth rate measures how quickly a company’s profits are increasing over time, typically expressed as a percentage. This represents the expected annual growth rate of a company’s earnings over a specified period, usually the next 3 to 5 years. This is a crucial metric for investors as it indicates a company’s financial health and potential for future returns.

Note that very high growth rates are typically harder to maintain as a company gets larger – this is often called the “law of large numbers.” A startup might grow earnings by 100% annually, while a mature company might target 5-10% growth.

How to calculate and analyze the PEG Ratio:

The PEG ratio is calculated using the formula: PEG Ratio = PE / Earnings Growth Rate. A PEG ratio below 1 suggests that the stock may be undervalued in comparison to its growth rate, indicating a potential buying opportunity. On the other hand, a PEG ratio above 1 may indicate an overvalued stock, as investors are paying more for each unit of growth.

Is a PEG ratio closer to zero better?

Not necessarily, a stock with a PEG ratio of 0.2 for example may seem extremely undervalued but may also indicate the market is discounting the stock due to hidden risks (e.g., weak fundamentals, declining industry, poor management).

• PEG 0.2:

  • Better if you’re seeking high-risk, high-reward opportunities and can confirm the growth is sustainable, with no hidden risks.

• PEG 0.8:

  • Better if you prefer a more balanced investment with potentially lower risk, even if the upside isn’t as dramatic.

Insider tips:

• Verify the sustainability of the growth rate (“G” in PEG). High growth projections could be overly optimistic or temporary.

• Check for external factors suppressing the stock price, such as litigation, regulatory issues, or macroeconomic pressures.

The PEG (Price/Earnings to Growth) ratio helps investors assess whether a stock’s price is reasonable given its expected growth. By factoring in growth expectations alongside the P/E ratio, it provides deeper insight, especially for fast-growing companies.

Think of it this way: A high P/E ratio might seem alarming at first glance, but if a company is growing earnings at 30% per year, that high multiple could actually indicate the stock is undervalued. The PEG helps capture this nuance.

There are some limitations though. For one, it relies heavily on growth projections, which can be unreliable – analysts often get these wrong. And it doesn’t work well for all companies. If a mature company has very low growth or a startup has extreme growth, the PEG might not tell you much. Similarly, if earnings are erratic or negative, the ratio loses its meaning.

The real value of PEG comes when comparing similar companies in the same industry. Since different sectors grow at different rates, comparing PEG ratios across industries (like comparing a tech company to a utility) isn’t particularly useful.

10 Stock picks

The stocks in this selection share these key characteristics:

• Diluted EPS 5 Year CAGR of over 15%

• Revenue 5 Year CAGR exceeding 10%

• PEG ratio below 1

1. Nvidia

NVIDIA Corporation provides graphics, and compute and networking solutions in the United States, Taiwan, China, and internationally. The company’s products are used in gaming, professional visualization, datacenter, and automotive markets.

Country: US
Sector: Semiconductors
Market cap: $3,411B
Revenue CAGR: 62.43%
EPS CAGR: 91.76%
PEG: 0.48x

2. Netflix

Netflix, Inc. provides entertainment services. It offers TV series, documentaries, feature films, and mobile games. The company provides members the ability to receive streaming content through a host of internet-connected devices, including TVs, digital video players, television set-top boxes, and mobile devices.

Country: US
Sector: Entertainment
Market cap: $400B
Revenue CAGR: 14.77%
EPS CAGR: 41.42%
PEG: 0.78x

3. TSMC

Taiwan Semiconductor Manufacturing Company Limited manufactures, packages, tests, and sells integrated circuits and other semiconductor devices. It provides complementary metal oxide silicon wafer fabrication processes to manufacture logic, mixed-signal, radio frequency, and embedded memory semiconductors.

Country: Taiwan
Sector: Semiconductors
Market cap: $834B
Revenue CAGR: 20.53%
EPS CAGR: 24.92%
PEG: 0.66x

4. Brown & Brown

Brown & Brown, Inc. markets and sells insurance products and services. It operates through four segments: Retail, National Programs, Wholesale Brokerage, and Services.

Country: US
Sector: Insurance
Market cap: $29.77B
Revenue CAGR: 14.5%
EPS CAGR: 21.25%
PEG: 0.88x

5. Medpace

Medpace Holdings, Inc. provides clinical research-based drug and medical device development services in North America, Europe, and Asia. It offers a suite of services supporting the clinical development process from Phase I to Phase IV in various therapeutic areas.

Country: US
Sector: Life sciences / health
Market cap: $10.59B
Revenue CAGR: 20.26%
EPS CAGR: 35.63%
PEG: 0.8x

6. Alchip

Alchip Technologies engages in the research and development, design, and manufacture of fabless application specific integrated circuits (ASIC), system on a chip (SOC), and provision of related services.

Country: Taiwan
Sector: Semiconductors
Market cap: $6.3B
Revenue CAGR: 67.17%
EPS CAGR: 81.36%
PEG: 0.43x

7. Mediatek

MediaTek Inc. researches, develops, produces, and markets integrated circuits (ICs). It provides multimedia, computer peripherals oriented, consumer-oriented, and other application ICs.

Country: Taiwan
Sector: Semiconductors
Market cap: $66.24B
Revenue CAGR: 16.59%
EPS CAGR: 38.82%
PEG: 0.54x

8. Take Two Interactive

Take-Two Interactive Software, Inc. develops, publishes, and markets interactive entertainment solutions for consumers worldwide. It develops and publishes action/adventure products under the Grand Theft Auto, Max Payne, Midnight Club, and Red Dead Redemption.

Country: US
Sector: Entertainment
Market cap: $33.45B
Revenue CAGR: 11.36%
EPS CAGR: 46.57%
PEG: 0.84x

9. BYD

BYD Company Limited engages in the research, development, manufacture, and sale of automobiles and related products.

Country: China
Sector: Automobiles
Market cap: $108B
Revenue CAGR: 38.29%
EPS CAGR: 64.99%
PEG: 0.68x

10. Super Micro Computer

Super Micro Computer, Inc. develops and manufactures high-performance server and storage solutions based on modular and open architecture.

Country: US
Sector: Tech hardware
Market cap: $22.42B
Revenue CAGR: 33.68%
EPS CAGR: 70.6%
PEG: 0.34x

Please note that this is not financial advice and purely for educational purposes. Qapital does not make investment recommendations to non-professional investors and no communication, through this website or in any other medium should be construed as a recommendation for buying or selling of any security. As always > DYOR