PEG Ratio Greater than Zero

A Green Flag: PEG Ratio Greater than Zero

Investment Green Flags: PEG > 0

Continuing with our green flag series, today we are going to be taking a look at the PEG ratio, and how well companies perform when their ratio is above 0.

Though an excellent flag, it doesn’t mean anything on its own – especially if you aren’t familiar with a PEG ratio. PEG is a ratio that was designed to look at the trade-off between the price of the stock, how much money the company is bringing in per share, and the annual eps growth.

We’ve taken it a bit further in our calculation and looked for the average annual EPS growth over the past five years. Beyond that number, you just need to divide that average growth into a company’s P/E, and you will successfully find the PEG ratio for that firm.

Now, with all of our green flags, a few rules must be followed. The first of which is that all green flags must have a win rate of greater than 50%. Over the past 17 years the flag “PEG > 0” took on more than 24,000 positions; of which, roughly 55% gave us a positive return. 

Diving deeper into the rules for Green flags, ever flag must outperform the benchmarked S&P 500 within the defined period. Over the past 17 years, we can easily see that the green flag beat the benchmark by a pretty significant margin. In that time, the green flag average 10.40% annually. Making 10% annually on a single line is pretty amazing in my book. Over that same period the benchmark only earned 5.18% annually – severely lagging behind our flag.

Lastly, we want to ensure that the green flag doesn’t take on an extreme amount of risk to achieve these returns.  The easiest way for us to assess this is to jump into our backtest report and take a look at the monthly standard deviation which currently sits at 5.49%.