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Relying solely on the price-to-earnings ratio can lead to costly investing mistakes because it ignores how fast a business is actually expanding. The PEG ratio solves this problem by factoring in earnings growth, revealing whether a stock trading at a high earnings multiple is genuinely expensive or secretly a bargain. While a PEG of 1.0 represents fair value, comparing companies like Apple and Nvidia shows how massive earnings growth can make seemingly expensive multiples remarkably cheap. However, investors must stay alert to decelerating growth, which can quickly turn an apparently cheap stock into an overvalued trap.
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