The PEG ratio gives us another view of the potential of CHWY. For those who need a refresher, the PEG considers both the current value of a company (as measured by the PE ratio) in the numerator of the ratio, and the EPS growth rate in the denominator. Here is Zacks definition of the PEG ratio:
PEG DETAILS This strategy uses the PEG Ratio to find attractively priced stocks poised for price appreciation. The PEG Ratio is simply the P/E (Price divided by Earnings) of a stock divided by its 5-year projected growth rate. Too often investors think of value investing being the antithesis of growth investing. The beauty of using PEG is that you can find value stocks even amongst hot growth stocks. Let’s take a closer look. A company with a P/E Ratio of 20 and a Growth Rate of 10% will have a PEG Ratio of 2.0 (20 / 10 = 2.0). While a company with a P/E Ratio of 40 and a Growth Rate of 50% will have a PEG Ratio of only 0.8 ( 40 / 50 = 0.8) The stock with the P/E of 40 is actually the better bargain since its PEG Ratio is lower (0.8) implying it’s undervalued with more upside potential. In general, a PEG value of less than 1 is considered undervalued while greater than 1 is thought to be fully valued to overvalued. The lower the PEG, the better the value, because the investor would be paying less for each unit of earnings growth.
If we use the RedChip 2009 and 2010 EPS numbers and today’s closing CHWY stock price of $5.65, the one year PEG calculates to an extraordinarily attractive .15. And that is way below that magic number of “1”. (At a PEG of “1”, the value of a stock matches its growth rate and we must then take a longer look at the stock). To give you some idea as to how beautiful a .15 PEG really is, the average PEG of all of the stocks monitored by First Call is currently 2.22. You might ask, “What would be the CHWY stock price if it’s PEG went to “1” tomorrow morning?” The answer is $37 per share. But, of course, that won’t happen because the stock market always looks ahead and knows that CHWY won’t sustain the 2009 to 2010 EPS growth rate of 195%. That would require CHWY to earn $1.56 in 2011 and that is too much to expect. Nevertheless, the very low PEG that CHWY is running at right now tells us it is way undervalued relative to its current EPS projected growth rate. If the price went to the RedChip target of $11 tomorrow morning, the PEG would still be a very low .30, and the PE on 2010 earnings would still be less than 20. The .30 PEG would tell us that even at a 20x PE, there is still plenty of room for PE expansion relative to the EPS growth rate. Heck, the new NASDAQ listing could take us over $8. That is what ‘The Shadow” says, and he knows everything. All is well in CHWY land. Jan
Jan.....Your very educational essays are what convinced me to invest in CSWI (CHWY) since last April. You do an excellent job!!!! Not such a "FUN DAY" today!!!!!!!!! Why is it going down, now .50, today?????
I know you didn't direct your question to me. However, I'd postulate it's just a little selling/profit taking from a few of the weak holders on a down (market) day.
I console myself by remembering no stock goes up in a straight line. And considering the small/microcap nature of CHWY, I'm sure we'll see many more days like this in the future. In between many awesome up days of course. But the trend is up Up UP!
Just another day in the market.
Jan. Thanks again for the reminder of the importance of the PEG ratio in determining value. Nice to have this forum opened up again.
You have me convinced. Think I can honestly say you are one of the best, along with the Shadow of course. Don't want to get on his or her bad side! Thanks again. The position of this company seems so ripe for a consolidation with someone else of a larger entity. Especially now.