Predicting which companies are going to expand fastest is tricky. Fortunately, there is at least some data you can turn to for guidance. That’s where the price-to-earnings growth, or PEG, ratio comes in.
The ratio was popularized in the 1980s by Peter Lynch, a Wall Street legend who averaged 30% returns over more than a decade. The PEG ratio takes the forward price-to-earnings ratio and divides it by that company’s future annual earnings-per-share growth rate. The lower the ratio, the cheaper the stock should be, based on its expected growth.
Ideally, the PEG ratio should be less than one. If the journalists at Advisor’s sister magazine, Canadian Business, applied such a strict condition to the Investor 500 this year, we’d be looking at a pretty short list. That should tell you something about the current growth prospects in this market.
But there is still value to be found. CB identifies Canfor, Cogeco Communications and Gildan Activewear as three of the top-growing stocks in the Canadian market. For the full ranking of growth companies, go to this link. Canadian Business’s annual Investor 500 ranks every major Canadian stock. To see the full portfolio, go to this link.