To analyze what makes some stocks cheap and other expensive, Cramer looked at an important metric called the PEG ratio. As an example, he compared two stocks in the same industry: Green Plains Renewable Energy and EOG Resources.
Green Plains is a $10 stock while EOG trades at around $97 a share. Share price doesn’t matter, though. Cramer cares more about the price-to-earnings multiple, which shows how much investors are paying for a company’s earnings-per-share. By this measure, Green Plains looks cheap, selling at just 6.3 times earnings while EOG sells for 22 times earnings. Yet this, too, is the wrong way to determine which is the least expensive stock.
Investors need to take the growth rates into account because growth determines how big a company's earnings will be going forward in what’s called the “outyears.” This is where the PEG ratio comes in – the P/E multiple divided by the growth rate. Green Plains has a 6.5 percent long-term growth rate for a PEG ratio of one. EOG has a 69 percent long-term growth rate, which gives it a PEG of just 0.3. Certainly, EOG is much cheaper than Green Plains. To Cramer, EOG is a buy, buy, buy.
Call Cramer: 1-800-743-CNBC
Questions for Cramer?
Questions, comments, suggestions for the Mad Money website? email@example.com