How to pick winning stocks? #1 PEG Ratio

I will write a series on my stock selection criteria, one at a time, in no particular order. #1 criteria does not mean the most important. They are ALL important!
My stock picking techniques are based on fundamental analysis. However, I inspect all 3 aspects of fundamental, technical and macroeconomy before making my buys.

#1 PEG Ratio
Previously, I have discussed about the PE Ratio.

From that discussion, the questions below arose:
Ahat about stocks that have single digit PE? Isn't that a bargain?
And does that hot stock deserve a PE of over 20?

Introducing the 'G' factor into the equation, GROWTH. PEG Ratio is PE over Growth.
PEG ratio of 1 is considered fair.
Less than 1 is undervalued.
More than 1 is overvalued.

Example:-
Using Dutch Lady (DLADY), let's start off with calculating its PE ratio.
Price: RM 20.84
Earnings per share, EPS : RM 0.9982
PE Ratio : Price/EPS
20.84/0.9982
20.87
For simplicity, let's take a round number of PE 21.

Scenario A
Assume DLADY average earnings growth : 21%
PEG ratio : PE/Growth
21/21
1
Thus, the share price of DLADY is deemed FAIR

Scenario B
Assume DLADY average earnings growth : 35%
PEG ratio : PE/Growth
21/35
0.6
Thus, the share price of DLADY is deemed UNDERVALUED

Scenario C
Assume DLADY average earnings growth : 7%
PEG ratio : PE/Growth
21/7
3
Thus, the share price of DLADY is deemed OVERVALUED

Actual Scenario
EPS growth of DLADY since 2007 average out to be 11%.













PEG ratio : PE/Growth
21/11
1.9



Buy when a share price is FAIR or UNDERVALUE. Translates into PEG Ratio of 1 or less.

Now, about that stock with PE ratio of over 20, say 25. With PEG ratio, we can decide if it is justifiable by check it's earnings growth. If it's growth has been phenomenal, growing at 30% for the past 3 years, that makes its PEG ratio less than 1, UNDERVALUE.

When checking for earnings growth, do look for consistent growth of 3 years or more. A spike in growth in mere 1-2 years isn't too reliable.