Using the PEG Ratio to Find Solid Small-Caps

In his latest Forbes column, newsletter guru Jim Oberweis discusses the value of using the P/E-to-Growth ratio to pick stocks.

“As a small-cap growth investor I look for outstanding businesses where I think earnings will grow more than most analysts expect,” Oberweis says. “But sometimes less exciting cyclical and moderate-growth businesses — bought at the right price — can be just as rewarding.” Oberweis, who uses the forecasted earnings growth rate for the “growth” portion of the PEG, says he’ll thus buy a basket of low-PEG companies. He likes PEGs of 1.0 and below, and is “downright giddy” when a stock has a PEG under 0.5.

“Note that such companies are hard to find without a catch,” Oberweis warns. “If due diligence returns a story with reasonable risks or a blemish that isn’t as relevant as others might think, less glamorous small-cap stocks with low PEG ratios can become star performers. They also help diversify portfolio risk.”

Oberweis offers a trio of low-PEG stocks he’s high on, including freight container leasing firm CAI International.