When I am looking for the best shares to buy now, one of the metrics I consider is the PEG ratio. This ratio considers a company’s projected earnings growth compared to its valuation. A ratio of less than one signifies the stock might look cheap compared to its growth potential. Meanwhile, a ratio above one implies the stock might be expensive.
If I had a lump sum of £500 to invest right now, I would concentrate on companies with a PEG ratio of less than one. I think this could be the best strategy to achieve the highest returns on my money.
And with that in mind, here is a selection of what I believe are the best shares to buy now for growth, considering their PEG valuations.
Growth opportunities
The first company on my list is the transformer developer XP Power. This group is currently seeing a surge in demand for electrical transformers, thanks to the green energy revolution. As the world invests more and more in green energy and renewable power, I think this demand will only continue to grow.
Unfortunately, XP Power is not the only company in the world producing these transformers. As such, the most considerable risk to the group’s growth is competition.
Despite this risk, with a PEG ratio of 0.7, I would buy the stock for my portfolio today. The shares also support an attractive dividend yield of 1.4%.
The best shares to buy
Over the past 18 months, the UK has experienced somewhat of a pet boom. This has produced windfall profits for Pets at Home. The specialist pets retailer reported a 47% increase in earnings per share for the financial year ended March.
Subsequent trading updates suggest this growth has continued. Management is reinvesting the group’s windfall in expansion initiatives, including developing the company’s vet service.
Considering all of the above, I think Pets still has a long runway for growth in front of it. That is why I would buy the stock for my portfolio today. Its PEG ratio is 0.5.
Challenges the group may face as we advance include wage inflation and competition, which could restrict earnings growth.
St James’s Place also makes it onto my list of the best shares to buy now, considering its current valuation. Thanks to a combination of rising equity markets and growing investor inflows, the company’s growth is accelerating. Based on this potential, the stock is trading at a PEG ratio of 0.8. The shares also support an attractive dividend yield of 3.1%.
Even though the stock looks attractive from a growth potential today, I cannot overlook potential risks. These include headwinds from competition and the potential for additional regulations, which could impact growth.
Despite these risks, I would buy the wealth manager for my portfolio today. Its growth outlook and dividend yield are both incredibly encouraging.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended XP Power. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
This post was originally published on Motley Fool
