what is a peer group 
the term peer group refers to a group of individuals or companies that share similar characteristics with one another these characteristics may be age education ethnic background size industry or sector peer groups are known for their influential nature as they are able to shape the decisions of members of the group as such peer groups often contain hierarchies with clear leaders who sit at the top peer groups are often used in analysis in a number of academic and professional fields understanding peer groupsas noted above peer groups contain a number of people or other entities that share one or more similar characteristics peer groups allow individuals to be grouped together by certain defining features such as age income education race and or gender qualities among members for corporate peer groups include size industry sector and or financial position 1peer groups are used in a number of different fields such as finance and marketing as well as sociology they are known for the influence they have among group members they consist of hierarchies which place one or a few individual group members at the top these members can often shape the actions and decisions of the other group members peer group analysis or peer comparison involves an apples to apples comparison this means the constituents of the peer group should be more or less similar to one another comparisons allow professionals to identify trends and anomalies in behavior and outcomes and give them an opportunity to figure out efficiencies and opportunities if not immediately obvious peer groups are sometimes identified by a given company in its 10 k filing and almost always in its proxy filing though the latter can be more expansive in terms of specific business sectors and is used to set executive compensation plans insurance companies compile peer groups to underwrite life or health insurance policies on certain demographics such as age related groups or those who do or don t smoke using peer groupspeer comparison is one of the most widely used and accepted methods of equity analysis used by professional analysts individual investors and professionals because companies in a peer group share similar traits they lend themselves to relative value analysis peer group analysis establishes a valuation for stocks in investment research as long as the group consists of companies similar to the one being researched this is especially key when it comes to business areas and market capitalization investors can use this analysis to spot valuation anomalies for certain stocks 2for example a stock trading at an earnings multiple of 15x compared with a 10x multiple for its peer group may be considered overvalued investors can uncover reasons for the higher earnings multiple and ultimately determine that it is deserved relative valuation among peers in a group can be efficient and effective quickly showing which stocks may be overvalued and which might make good additions to a portfolio while there are other methods to determine when a stock is worth buying such as discounted cash flow or technical analysis peer comparison analysis remains a key tool for uncovering undervalued stocks 3because the data necessary to conduct the analysis is generally public and readily accessible on financial websites it is easy for anybody to begin employing this method of analysis in order to identify opportunities peer group comparisons are also called comparables or comps peer groups are important in advertising and marketing especially in the age of social media leaders in the group or those who are at the top of the hierarchical ladder are commonly known as influencers professionals study peer groups to show how they influence buying patterns and consumer trends for advertising and product development purposes 4advantages and disadvantages of peer groupspeer group analysis helps shape many decisions in the financial and investment worlds there are a number of different benefits to using peer groups especially in investment analysis but just like any other analytical tool there are drawbacks to this form of analysis as well we ve listed some of the most common ones below one of the most obvious benefits of using peer group analysis is that it helps investors and analysts uncover undervalued stocks this is often accomplished by analyzing different metrics including leverage and profitability among others doing so allows the individual to determine companies that should carry higher than average valuations a stock may be considered a buying opportunity if the current valuation is lower than what seems reasonable investors and professionals don t have to go far to get the information they need to perform peer group analysis data is easily available either on company websites or through filings done with the securities and exchange commission sec this means the individual doesn t need to do exhaustive research 2conducting peer comparisons give investors a chance to determine certain anomalies and trends that arise with different companies and in the market in general 5doing a peer comparison isn t as easy as it seems that s because quantitative factors aren t the only considerations in fact there are qualitative issues that must be taken into account this means that the analysis can be fairly subjective peer groups often come with certain biases which can sway an analyst or investor s analysis for example some groups come with survivorship bias this means that the peer group may not contain any companies that underperform this type of analysis therefore doesn t take companies that have gone under or phased out of the group into account 6there may not be very many companies in the peer group when this is the case peer comparison becomes ineffective in order for it to work there needs to get a sizeable group of companies that can be compared to one another 2helps uncover buying opportunities for undervalued securitiesaccessing data is easily available for comparisonallows anomalies and trends to be identifiedmay be subjective because some investors also consider qualitative factors into accountsurvivorship bias doesn t account for members that are phased out of the groupmay not be enough companies in the groupexample of a peer grouppeer groups refer to companies that are in the same industry or sector these are competitors that are roughly the same size peer groups can be found in analyst research reports or an individual company s financial statements lockheed martin is an aerospace defense and security company headquartered in maryland according to the company s 2017 proxy statement its peer group consists of other similar companies as its peers including general dynamics raytheon and northrup grumman it also lists caterpillar ups and 3m 7peer group faqsthere are several different types of peer groups including social groups cliques sports teams etc in investing and finance peers may be grouped by industry or sector consumer staples retail telecoms size usually by market cap financial health profitability capital structure or business factors business models location seasonality peer group analysis is a process involving the comparison of entities that share similar characteristics it is an apples to apples comparison of subjects that are fairly similar to one another this kind of analysis allows for the identification of trends and anomalies in behavior and outcomes a peer group index is one that groups individual companies together into a single benchmark index for instance the s p 500 can be considered a peer group index this index is comprised of 500 of the largest public companies in the united states and is generally considered the best gauge of u s large cap equities a peer group average is considered one of the most effective and efficient ways to determine the valuation of a security put simply investors can use certain metrics drawn from corporate financial statements to assess a certain company s stock price compared to its peers companies are grouped into peer groups for ratio analysis as part of fundamental analysis it allows researchers to determine individual company liquidity efficiencies as well as profitability this is done by examining each company s past and current financial statements and comparing them with one another some of the most popular ratios include price to earnings p e price to book and price to dividend ratios the bottom linepeer groups consist of similar entities that share one or more characteristics in common they serve a very important purpose in many different fields of study they can be one of the most useful tools when it comes to equity analysis for investors and financial professionals anyone can perform peer group comparisons using information that is widely available on corporate websites or through the sec 