The basic idea behind the measure is common sense. So far, so good. But there are a few catches. At the other extreme, you can't rely on PEG ratios for dot-coms. In fact, PEG ratios work best for stocks with annual earnings growth in the teens.
PEGs also work best for firms with highly predictable core growth rates.
And that's not all. As a rule, PEGs below 1.0 have the most predictive value. But in the crazy market of the past two years, high-PEG stocks have been the biggest winners, as investors have bid expensive stocks up even higher. I think this manic market phase is over. But even among stocks with PEGs below 1.0, you have to look at more than just the number.