I pretty much agree with what Doug replied, how-some-ever, I do have some modifications...
1. As to Risk/Reward, conventional evaluation suggests that a 3:1 upside/ sownside ratio is desired, however, recent conversations on this subject directs our attention to the Projected Average Annual Compound Rate of Return (Total Return) being in excess of 15%. If one has exercised due diligence in being conservative in his growth and AVERAGE High and Low PE ratios, then a desired Total Return in excess of 10% - 11% should be acceptable. One of the problems I have seen with using the Upside / Downside ratio is that many users of the Stock Selection Guide tend to engineer the projected Low Price to create an 'acceptable' U/D Ratio. Recognizing Risk is very important, but we are in it for appreciation, thereby suggesting focusing on the Total Return aspect.
2. I agree with Doug on this point, however, as with most situations that are out of the norm, one should evaluate just what may be driving the price to a point which supports an 'abnormally low' PE ratio. It may be a simple case of floating with the industry, while the fundamentals of the company are still intact. On the other hand, the market may 'see' something about the company that is not yet reflected in the fundamentals; this is tantamount to grasping at a falling knife.
3. I seem to recall that the NAIC literature suggested an AVERAGE High PE Ratio not exceed 30, which aligned itself with an EPS growth rate of no more than 20%, and a PEG ratio of no more than 1.5. A projected AVERAGE High PE Ratio of no more than 25 should be supported by the projected growth rates; if projected growth rates are lower than those recently experienced, then a lower AVERAGE High PE Ratio would be a logical choice.
4. I don't use PEG ratios, as they seem to be very company specific, rather than of a generic sort to be applied as a general rule.
5. See my comment #1.
Al