Peter Lynch

The 3 most undervalued tech stocks: Google, Apple, IBM

June 19, 2011: 7:08 AM ET

By the same "PEG" measure, the 3 most overvalued are Amazon, Cisco and Netflix

Click to enlarge. Date: NASDAQ. Chart: PED

Here's a simple exercise suggested by one of my readers.

Take a stock you're interested in and calculate its price/earnings to growth ratio, better known as its PEG ratio. The formula looks like this:

According to Peter Lynch, who popularized the measure, the P/E ratio of any company that's fairly priced will equal its growth rate. In other words, a stock with a PEG ratio less than one is probably undervalued. Conversely, if you're paying more than a PEG of 1.0 for a stock, you're probably paying too much.

So what's Apple's (AAPL) PEG Ratio? According to NASDAQ's website, which uses the 12-month forecast earnings and growth rates of a consensus of financial analysts, it's 0.73, considerably less than 1.0. The only major tech stock with a lower PEG ratio is Google (GOOG) at 0.59. On the other end of the spectrum are Amazon (AMZN), Cisco (CSCO) and Netflix (NFLX) with 12-month PEG ratios of 10.65, 8.03 and 6.71, respectively.

Go figure.

Current Issue
  • Give the gift of Fortune
  • Get the Fortune app
  • Subscribe
Powered by WordPress.com VIP.