PEG - the way to an undervalued stock

Investment Ideas

5 Stocks with Magic PEG Ratios

By: Tracey Ryniec

January 21, 2010 | Comments: 1

Recommended this article (6)

COCO | DECK | FRPT | TEVA | TRLG

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What if you could find a stock that not only was undervalued but had the possibility of big growth? I know what you're thinking, that it's nearly impossible to find those stocks. It's the holy grail of investing: a value stock that also has growth.

But here's a little secret. They do exist.

And no, they're not some $1 stock with little volume or other risky fundamentals.

Using the PEG Ratio to Find Great Stocks

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. He looked to the PEG ratio instead which combined both value and growth.

The PEG ratio is calculated by taking the price-to-earnings (P/E) ratio and dividing it by the growth rate.

Screening for PEG ratios under 1.0, which is considered the "magic" number for undervalued stocks, I was able to find dozens of companies that are cheap, have double digit growth and a Zacks Rank of #1 (strong buy) or #2 (buy).

Even though we've seen a huge stock market rally over the last 9 months, companies with low PEG ratios are clearly still out there.

I whittled down that list to 5 companies that are dirt cheap and have outstanding fundamentals.

5 Stocks With Magic PEG Ratios

Deckers Outdoor Corporation (DECK - Analyst Report), the manufacturer of the ever-popular UGG Australia brand of shoes and boots, has a PEG ratio of only 0.56.

The third quarter was a record quarter as UGG sales jumped 19.1% worldwide. Analysts expect 5-year earnings growth of 22.63%. The Zacks #2 Rank (buy) stock has a forward P/E of 12.8.

Force Protection Inc. (FRPT - Snapshot Report) trades with a PEG ratio of 0.57. The company manufactures ballistic- and blast-protected vehicles which have been recently been used in Iraq and Afghanistan.

Given the increased troop deployment to Afghanistan, analysts are projecting 5-year earnings growth of 20%. Force Protection is a Zacks #2 Rank (buy) stock and has a forward P/E of only 11.5.

Corinthian Colleges (COCO - Snapshot Report) hasn't gotten much love from investors even as it has surprised on estimates 4 quarters in a row. The higher education company which offers associates, bachelor's and master's degrees in a host of areas, has seen explosive growth during the recession as people return to school to train for new careers.

Corinthian Colleges has a PEG ratio of just 0.35. In fiscal 2010, Corinthian is projected to grow earnings by 87%. Growth isn't expected to be limited to just this year as analysts see 5-year earnings growth of 24.09%. The Zacks #2 Rank (buy) stock is trading with a forward P/E of just 8.5.

You can see the recent weakness in the stock in the 1-year chart below.

Teva Pharmaceuticals (TEVA - Analyst Report) seems an unlikely candidate to be both a value stock and have growth. But the generic drug giant has expanded its business due to its acquisition last year of Barr Pharmaceuticals.

Analysts expect big earnings growth in 2010 of 34.41% and project five-year earnings growth of 21.66%. The company has a tremendous history of beating estimates. The last time it missed was in 2007.

Teva has a PEG ratio of 0.60. It is trading at 12.9x forward earnings. Teva is also a Zacks #2 Rank (buy) stock.

True Religion Apparel Inc. (TRLG - Snapshot Report) has a strong brand in a hot segment of the clothing market: jeans.

The company has been able to grow even during the rough retail environment of 2009. By the end of the third quarter of 2009, True Religion had 66 retail stores compared to just 36 stores the year before. It forecast having 70 stores by the end of 2009.

True Religion sports a PEG ratio of only 0.23 as analysts expect big 5-year earnings growth of 43.5%. On a purely PEG ratio basis, True Religion is the best value of all of these 5 stocks. The Zacks #2 Rank (buy) stock is trading at just about 10x forward earnings.

The Holy Grail of Investing Does Exist

Value stocks don't have to be boring. Growth stocks don't have to be expensive. The Holy Grail of investing does exist if you dig deep enough. Use the magic of a low PEG ratio to find great growth stocks.

Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor in charge of the market-beating Zacks Value Trader service.

An Understanding of Gold Price

From Wikipedia, the free encyclopedia

The Brown Bottom (or Brown's Bottom) is a term used to describe the period between 1999 and 2002, when gold prices were at their lowest in 20 years following an extended bear market.^{[1][2][3][4][5][6]}

The period takes its name from the decision of Gordon Brown, then the UK's Chancellor of the Exchequer and later to become Prime Minister, to sell approximately half of the UK's gold reserves in a series of auctions. At the time, the UK's gold reserves were worth about US$6.5 billion, accounting for about half of the UK's US$13 billion foreign currency net reserves.^[7] The UK government's intention to sell gold and reinvest the proceeds in foreign currency deposits, including euros, was announced on 7 May 1999, when the price of gold stood at US$282.40 perounce.^[8] The advance notice of the substantial sales drove the price of gold down by 10% by the time of the first auction on 6 July 1999.^[1]With many gold traders shorting, gold reached a low point of US$252.80 on 20 July.^[8] The UK eventually sold about 395 tons of gold over 17 auctions from July 1999 to March 2002, at an average price of about US$275 per ounce, raising approximately US$3.5 billion.^[8]

To deal with this and other prospective sales of gold reserves, a consortium of central banks - including the European Central Bank and theBank of England - were pushed to sign the Washington Agreement on Gold in September 1999, limiting gold sales to 400 tonnes per year for 5 years.^[7] This triggered a sharp rise in the price of gold, from around US$260 per ounce to around $330 per ounce in two weeks,^[7] before the price fell away again into 2000 and early 2001. The Central Bank Gold Agreement was renewed in 2004 and 2009.

Gold prices remained relatively low until 2001, when the price began consistently rising in a protracted bull market. By 2007, the price of gold had reached US$675, and the loss to the UK taxpayer was estimated at more the £2 billion, as the euros bought with the proceeds had also risen in value.^[1] The gold price briefly passed US$1,000 per ounce in March 2008,^[9] before reaching all-time highs of $1,043.77 on 6 October 2009^[10] and $1,048.40 on 7 October 2009,^[11] by which time the loss to the UK taxpayer was approximately £4 billion. Gold prices continued to rise, passing US$1,100 per ounce in early November 2009.^[12]

The decision to sell gold at the low point in the price cycle has been likened to the mistakes in 1992 that led to Black Wednesday, when the UK was forced to withdraw from the European Exchange Rate Mechanism, which HM Treasury has estimated cost the UK taxpayer around £3.3 billion.^[1]

The Uses of Silver

• Traditional
  • Coinage
  • Photography
  • Silver Jewelry
  • Silverware and Table Settings
• Industrial
  • Batteries
  • Bearings
  • Brazing and Soldering
  • Catalysts
  • Electronics
• Emerging
  • Medical Applications
  • Mirrors & Coatings
  • Solar Energy
  • Water Purification
  • (Silver has many uses. The ones mentioned above, extracted from The Silver Institute are quite comprehensive.)

Useful Tips

To trade or invest successfully, you must have the knowledge to choose, the patience to wait, the will to win, the discipline and courage to implement, and most importantly, the wisdom to act wisely. Of course you must have cash as well.

Gold Analysis

The current bull market in gold is far from over. In fact it is only beginning.

While it has come off its highs, gold is still up 30% this year and, many factors still point to a long term bull trend.

Author: David Levenstein
Posted: Monday , 28 Dec 2009

As we see the end of another year, and even though the price of gold has come off its highs of over $1225, the price gold gained some 30% this year. Now, as the dollar rebounds from it's lows, and as most equity analyst are looking for global equities to continue upwards, there is talk that gold has made it's high. While we are all entitled to our opinions, I believe that these analysts fail to see the bigger picture and that the price of gold has a long way to go before this bull market peaks.

From the 1980's high of $850, gold was in a bear market for some 21 years. During those years, the International Monetary Fund (IMF) as well as most central banks around the world tried to sell as much gold as possible. Some of the sales were done with "impeccable" timing such as the sales made by the United Kingdom that sold a large portion of their gold during 1999 and 2002 when the price of gold was around $275. And, as these bankers disposed of their gold holdings, the bullion banks in London and New York kept going short gold by using the futures markets.

The reason for me mentioning this is because I believe there are still many people who are of the mindset of this era and fail to see that since 2001 gold has been in a very strong bull market and still is. And this bull market is far from over. Yet, even to this day, the major bullion banks in New York maintain unusually large short positions of gold. One simple trading rule is to always follow the trend. If they can't see this upward trend, then perhaps they are looking at their charts upside down!

While the price of gold is influenced by many different factors the major driving force has been the lack of confidence people have had in all the major currencies, especially the US dollar. And, as some of these currencies have done well against the US dollar, gold has gone up substantially against practically all these currencies. It has gone up against the US dollar, the British pound, the Canadian dollar, the Chinese Yuan, the Swiss Franc, the Russian Rubble, the South African Rand, and the Mexican Peso, just to mention a few of the currencies.

Now, because the US dollar has lost more than 30% of its value since 2001, there are many investors who believe that the it is set to rebound in a big way during 2010 and thereby cause a drop in the gold price. Frankly, I don't see it. I still see the trend for the US dollar as downward, and while we may expect to see it rally during this down trend, I doubt that we are going to see a complete reversal in trend. How is this going to be possible when the current national debt of the US is around US$ 12 trillion and counting? And, while inflation remains very low worldwide, with these expansionary monetary policies, it is a matter of time before we see inflation increase. And, this will be just another catalyst for the gold price to make more new historic highs. When this happens the current price of gold will look like bargain prices.

As this financial crisis continues, it is expected that more countries will encounter financial problems. Already, there is talk about Ireland, Spain, the UK in addition to Greece and Dubai. And despite the fact the investors usually rush into the US dollar as the ultimate safe haven, it is a matter of time before they realize that things have changed and that the US dollar is not going to be the store of wealth that it once was.

Technicals

It seems that the current correction in the gold price has found good support above $1075. While there may still be more selling pressure in the gold market, I believe that we will see the end of this correction during the month of January.

About the author

David Levenstein is a leading expert on investing in precious metals .He brings over 29 years experience in futures, equities, forex and bullion. And, although he began trading silver through the LME in 1980, when it comes to gold, he has traded gold bullion, gold coins, gold shares, gold ETF, gold funds and gold futures for his personal account as well as for clients. Over the years, David has been published in dozens of publications and has appeared on CNBC and Summit TV (South Africa), and is a regular guest on JSE Direct, a premier radio business channel in Johannesburg, South Africa. He is also a regular commentator on www.kitco.comand www.mineweb.com David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.

For more information go to: www.lakeshoretrading.co.za

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.