Peer Group

Reviewed by Bhavana | Updated on Aug 27, 2020

Introduction

A group of individuals who share similar characteristics and interests are called peer groups. Peer groups, in the case of individuals, have characteristics that include similarities between their individual members, such as socioeconomic status, education level, ethnic background, and so on.

A peer group refers to firms in the same industry sector that are competitors and of similar size. A peer group refers to individuals or organizations that have several attributes, making them as a group easily comparable.

Individual peer groups include individuals that share similar characteristics, such as income, location, age, or ethnicity. Company peer groups include businesses or rivals in the same industry sector and can be used for peer review.

Importance While Investing

Peer group analysis is an essential part of assessing a price for a particular stock in investment research. The emphasis here is on making a comparison, meaning that the peer group constituents should be more or less identical to the company being examined, especially in terms of their main business and market capitalization areas.

Understanding Peer Group

Analysis of the peer group can allow investors to recognize valuation anomalies for a particular stock. For example, a stock trading at a 15x earnings multiple–compared to its peer groups average multiple of 10x–could be deemed overvalued as justifiable. Additionally, investors should recognize the potential reasons for multiple higher earnings and ultimately determine what they deserved.

Peer comparison is one of the stock research approaches used by professional analysts and individual investors most commonly and embraced. It has shown results of being efficient and effective, showing quickly which stocks can be overvalued and which could add to a portfolio in a good way.

While there are other ways to determine when a stock is worth purchasing, such as technical analysis, discounted cash flow, or peer comparison, analysis remains as a key tool for undervalued stock uncovering.