Tags: PEG | small cap | tech | S&P

Small-Cap Tech Stocks Most Undervalued Sector in Market

By    |   Wednesday, 27 August 2014 07:49 AM

Many sectors within the stock market are overvalued by traditional measures. Small-cap tech stocks are an exception and are undervalued by at one least valuation model.

To find the fair value of stocks, some analysts use the price-earnings (P/E) to growth (PEG) ratio. This ratio compares the P/E ratio with the earnings growth rate. Unlike most valuation metrics, the PEG ratio recognizes that companies with rapid earnings growth should trade at a premium to companies without earnings growth.

Analysts generally assume a PEG ratio of 1.0 represents fair value. This occurs when the P/E ratio is equal to the earnings growth rate. A utility company with earnings growth of 10 percent a year would trade at fair value when the P/E ratio is equal to 10. A P/E ratio of 30 would be appropriate for tech companies with year-over-year earnings growth of 30 percent.

Standard & Poor's data show the stocks in the S&P 500 have an average PEG ratio of 1.4, indicating large caps are slightly overvalued. Small-cap stocks in the S&P 600 offer slightly better value, with a PEG ratio of 1.3.

Only one sector has a PEG ratio below 1 —small-cap information technology. There is just one exchange-traded fund (ETF) that specifically tracks this sector, PowerShares S&P Small Cap Info Tech ETF (PSCT). The ETF is thinly traded and relatively small, with assets of approximately $200 million.

The PEG ratio indicates investors could find the best combination of value and growth in the small-cap information technology sector.

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MichaelCarr
Many sectors within the stock market are overvalued by traditional measures. Small-cap tech stocks are an exception and are undervalued by at one least valuation model.
PEG, small cap, tech, S&P
250
2014-49-27
Wednesday, 27 August 2014 07:49 AM
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