Smaller the better: 4 stocks with the right PEG ratio for long-term wealth creation

Given the huge difference in what is value and what looks cheap due to one financial ratio, more often than not, relying on PE may lead to wrong investment decisions. PEG ratio is much better compared to the commonly used P/E ratio. It helps in avoiding stocks which might appear cheap but actually are not value buys. Especially in sectors like banking and metal where the operating matrix is very different from the manufacturing sector.

Given the huge difference in what is value and what looks cheap due to one financial ratio, more often than not, relying on PE may lead to wrong investment decisions. It would be better to use the PEG ratio. Calculating it is a complex process and comes with its own set of challenges. The challenge with PEG ratio is the quality of the earning forecast and given that in an ever-changing macro environment, even the best of the forecast for any business can go wrong which may impact other elements which lead to some unexpected changes.

Because it is easy to calculate and understand the valuation ratios, the PE ratio often acts as an anchor when investors are making investment decisions. Given the huge difference in what is value and what looks cheap due to one financial ratio, more often than not, relying on PE may lead to wrong investment decisions.

However if one looks at the history of financial markets, there are phases where multiple challenges have come up for the sector at the sametime. But given the savings matrix which Indian’s have, despite all that may have happened, on an overall basis the financial services industry has grown and some select stocks have given decent returns to their shareholders.