3 Stocks With Magic PEG Ratios - Investment Ideas
22 Marzo 2012 - 1:00AM
Zacks
Value investors have long looked to the price-to-earnings ratio as
a means to finding value stocks. However, Benjamin Graham, long
considered to be the "father" of value investing, found that a low
price-to-earnings ratio wasn't enough to unearth the true
undervalued companies.
Graham combined the low price-to-earnings ratios
with the power of growth by using the PEG ratio. The PEG ratio is
calculated by taking the price-to-earnings (P/E) ratio and dividing
it by the growth rate.
Normally, a stock with a PEG ratio under 1.0 is
considered a "value". However, despite the stock rally in 2012,
there are quite a few stocks that are trading with PEG ratios far,
far lower than 1.0.
Screening for PEG
I created a screen for PEG ratios under 0.25, which
would be an extremely low PEG ratio, on Zacks free Custom
Screener.
Just this one criteria gave me 44 stocks. That's
not too shabby.
But all 44 companies are not necessarily good value
stocks. I eliminated companies that had a Zacks rank of 4 or 5 and
then considered other fundamentals such as earnings surprises,
return on equity and earnings history.
3 Stocks with Low PEG Ratios and Solid Value
Fundamentals
The following 3 companies stood out because they
had both stellar value fundamentals, including a low PEG ratio, and
a solid business story, including earnings growth.
- Grupo Galicia
- Seagate
- Gulfport Energy
1. Grupo Galicia (GGAL)
Banks have been out of favor. Grupo Galicia is the
holding company for Banco Galicia, one of Argentina's oldest banks.
It provides financial services to corporations and individuals
throughout Argentina. It also is a big supplier of credit
cards.
- PEG Ratio: 0.1
- Industry: 1.4
- 2012 Expected Earnings Growth: 2.4%
Grupo Galicia has a high return on equity (ROE) of 36%, which is an
important fundamental for a bank. Its peers average just 24.5%.
Additionally, shareholders get a small dividend,
yielding 0.3%. Grupo Galicia is a Zacks #3 Rank (Hold).
2. Seagate Technology (STX)
Seagate manufactures hard disc drives worldwide.
There have been concerns about the hard drive industry since the
floods in Thailand last year hit global production. Seagate is
super cheap with a forward P/E of just 4.3.
- PEG Ratio: 0.2
- Industry: 0.2
- Fiscal 2012 Expected Earnings Growth: 405.4%
Seagate is expected to have record fiscal 2012 and 2013 results. It
is a Zacks #1 Rank (Strong Buy).
3. Gulfport Energy (GPOR)
Gulfport Energy is an oil and natural gas explorer
and producer with operations along the Louisiana Gulf Coast, in the
Permian Basin and Utica Shale. The company also has an interest in
the Alberta Oil Sands. The energy stocks have been overlooked by
investors over the past few months. Gulfport has a forward P/E of
just 11.8.
- PEG Ratio: 0.2
- Industry: 9.8
- 2012 Expected Earnings Growth: 23.1%
Gulfport is a Zacks #3 Rank (Hold) stock.
Low PEG Ratios Are the Beginning Not the
End
Seeking a low PEG ratio is a good way to begin a
search for value stocks but it's not the only indicator. As
outlined here, start with the PEG ratio and also screen for other
fundamentals. Combined with other value indicators, the PEG ratio
can be a powerful tool for value investors.
Tracey Ryniec is the Value Stock Strategist for
Zacks.com. She is also the Editor of the Turnaround Trader and
Insider Trader services. You can follow her on twitter at
@TraceyRyniec.
GRUPO GALIC ADR (GGAL): Free Stock Analysis Report
GULFPORT ENGY (GPOR): Free Stock Analysis Report
SEAGATE TECH (STX): Free Stock Analysis Report
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