PEG accounts for the fact that faster-growing companies deserve higher P/E ratios. A PEG under 1 has traditionally been considered cheap relative to growth.
Its accuracy depends entirely on the growth assumption used. Optimistic analyst forecasts can make expensive stocks look reasonable on PEG.
See also
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Open Decision Lab →Frequently asked questions
Who popularised PEG?
Peter Lynch, in 'One Up on Wall Street'.