Dow Jones 8843.61 +132.43 10:00 am PST, May 30, 2003  NASDAQ 1591.53 +16.58 For info, visit access.smallcapnetwork.com S & P 500 961.96 +12.32 To be removed, please click here Russell 2000 438.79 +6.15 VOLUME 03: ISSUE 26  PEG Ratios: A leg up on the Market? Before we enter into a discussion of how to calculate a price/earnings to growth (PEG) ratio, a word of warning: when taking this figure from a quote provider, make sure you know exactly how it was calculated. Some providers use historical earnings growth in their PEG calculations, while others use projected numbers. The resultant ratios will be very different. The PEG ratio is calculated by dividing the price/earnings  (P/E) ratio by the earnings per share (EPS) growth. The PEG ratio gives investors more information than the p/e ratio, as there are more constituent numbers. While the p/e tells the story of how a stock fares in the current environment against its own historical p/e, those of its peers and against the market overall, the PEG takes the process one step further and relates a company's growth to share price. In this way, investors can see whether the share price is overvalued or undervalued based on historical or projected growth figures. A calculating PEG The growth figure used in the calculation should be the average gleaned over more than one year. A three to five year growth figure is a good benchmark, whether historical or projected data is used. This smooths out one-time earnings spikes as well as cash or non-cash items that can either inflate or deflate earnings numbers.  In our discussion on p/e's, we used White Electronics (NASDAQ: WEDC). Apples to apples--let's use it here, too. First, some context. A PEG ratio revolves around 1.0, which represents fair value for a stock. A calculation of more than 1.0 denotes overvalued-the further past 1 the more overvalued. Conversely, a reading under 1 represents an undervalued situation. That said, investors have to factor in the pounding earnings growth has taken over the past few years. Just as p/e's are improving and a higher reading may not be indicative of an exorbitant valuation, so too a PEG that may be higher than historic norms must be viewed relative to lousy past growth and currently improving prospects.  Though more indicative than a simple p/e ratio, the PEG is merely one more tool on the road to due diligence.  Using it in isolation would be just plain goofy. And dangerous. 1.0 is the loneliest number? First Call has posted a projected average annual growth rate for WEDC of 14 percent for the next five years. As well, the projected price/earnings ratio averages around 18 times over the next two years. If we divide the projected p/e by the growth rate the PEG equals 1.28 times. At first glance, the shares may appear slightly overvalued, but we have to view past performance in context when deciding on the worth of a PEG ratio.  Let's take the ratio to a bigger stock. While Cisco Systems (NASDAQ: CSCO) has a mean growth rate of 15 percent for the next five years, the projected p/e is at 25 times, With the shares at $16.40 and the consensus projected earnings at 64 cents for fiscal 2004, the PEG comes in at 1.66 times. Again, context. Microsoft's (NASDAQ: MSFT) PEG comes in at around 1.5-1.6 times. As you can see, a small company such as WEDC may well have a lower PEG ratio than its higher profile tech peers. The determination therefore is relative. Those growth numbers are likely improving-although they're more muted-due to the ugly markets of the recent past and the new conservatism that has been forced upon companies and analysts. It's back, baby... As a result of the lousy earnings growth experienced in the recent past, the PEG ratio became meaningless and was all but abandoned. That was then. Now, as we see companies trim costs, grow earnings, and the market become a might calmer, the PEG will likely re-appear as a valuable tool that allows investors to quick-ratio a potential investment. Calculate the PEG often, as the constituent numbers can change frequently. In the big picture, the S&P 500 index has a current PEG ratio of around 1.25-1.3 times, based on projected growth figures. Historical annual earnings growth averages 11 percent, while projected annual earnings growth is estimated at 21 percent. The current p/e ratio for the S&P 500 is 26-27 times. If the historic earnings growth rate of 11 percent is used, the PEG rises to 2.4. Hence the need, as mentioned at the outset, for determining which growth figure is used.  Things do, however, appear to be looking up. Investors can calculate the PEG both for individual stocks and for their own portfolios. Calculating the PEG ratio for a portfolio is an excellent way to measure how much risk you are assuming against a diversified benchmark such as the S&P 500. If you find your projected portfolio PEG is in the double digits with the S&P 500 PEG around 1.3 times, you'd best rethink your strategy. Ever use the PEG? Anything else on your mind? Sure there is. Send thoughts in here: editor@smallcapnetwork.com Unsubscribe Here D I S C L A I M E R : The SmallCap Digest is an independent electronic publication committed to providing our readers with factual information on selected  publicly traded companies. SmallCap Digest is not a registered investment advisor or broker-dealer. All companies are chosen on the basis of certain financial analysis and other pertinent criteria with a view toward  maximizing the upside potential for investors while minimizing the downside risk, whenever possible.  Moreover, as detailed below, this publication accepts compensation from third party consultants and/or companies which it features for the publication and circulation of the SmallCap Digest or representation on SmallCapNetwork.net.  Likewise, this newsletter is owned by TGR, LLC.  To the degrees enumerated herein,  this newsletter should not be regarded as an independent publication. Click Here to view our compensation on every company we have ever covered, or visit the following web address:  http://access.smallcapnetwork.com/compensation_disclosure.html for our full compensation disclosure and http://access.smallcapnetwork.com/short_term_alerts.html for Trading Alerts compensation and disclosure. TGR Group LLC has not been compensated for this report. All statements and expressions are the sole  opinions of the editors and are subject to change without notice. A profile, description, or other mention of a company in the newsletter is neither an offer nor solicitation to buy or sell any securities  mentioned. While we believe all sources of information to be factual and reliable, in no way do we represent or guarantee the accuracy thereof, nor the statements made herein. The editor, members of the editor's family, and/or entities with  which the editor is affiliated, are forbidden by company policy to own, buy, sell or otherwise trade stock for their own benefit in the companies who appear in the publication. The profiles, critiques, and other editorial content of the SmallCap Digest and SmallCapNetwork.net may contain forward-looking statements relating to the expected capabilities of the companies mentioned herein. THE READER SHOULD VERIFY ALL CLAIMS AND DO THEIR OWN DUE DILIGENCE BEFORE INVESTING IN ANY SECURITIES MENTIONED. INVESTING IN  SECURITIES IS SPECULATIVE AND CARRIES A HIGH DEGREE OF RISK. THE INFORMATION FOUND IN THIS PROFILE IS PROTECTED BY THE COPYRIGHT LAWS OF THE UNITED STATES AND MAY NOT BE COPIED, OR REPRODUCED IN ANY WAY WITHOUT THE EXPRESSED, WRITTEN  CONSENT OF THE EDITORS OF SMALLCAPNETWORK.NET. We encourage our readers to invest carefully and read the investor information available at the web sites of  the Securities and Exchange Commission ("SEC") at http://www.sec.gov and/or the National Association of Securities Dealers ("NASD") at http://www.nasd.com. We also strongly recommend that you read the SEC advisory to investors concerning Internet Stock Fraud, which can be found at  http://www.sec.gov/consumer/cyberfr.htm . Readers can review all public filings by companies at the SEC's EDGAR page. The NASD has published information on how to invest carefully at its web site.