Everyone likes a good stock tip: a hot new Internet company, a
disruptive technology, an acquisition rumor -- anything that gets
the adrenaline pumping. This type of hearsay-based buying and
selling can net investors a buck or two now and then, but rest
assured, someone already knows what you know and has already made
The reality is that there simply aren't many shortcuts for
individual investors. Most of the time, the path to positive
returns winds through doing your homework and crunching the
Luckily, number-crunching is one of our specialties at
For investors who've read
Inside the Numbers
in the past, you've probably noticed that a certain ratio is used
in many of our screens. There's a reason for that. Without a doubt,
it's one of the easiest ways of measuring a company's true value.
It's called the PEG ratio.
On its face, a basic price-to-earnings ratio (P/E) can't tell you
what a PEG ratio can. P/E ratios are useful in the right context:
usually for comparing a stock to its historical valuation, its
peers or the broader market. But for my money, the PEG is superior
in a lot of ways.
For those unfamiliar with PEGs, the calculation is fairly simple.
You take a stock's P/E ratio and divide it by the stock's earnings
PEG = P/E / Estimated Long-term Growth
The beauty of this calculation is that it makes it possible to find
the best of both worlds: an undervalued stock with a strong growth
There's only one flaw with this calculation: it doesn't account for
dividend yields. And for an income investor looking for a
combination of reasonable growth and income, unfortunately, PEG
just doesn't cut it.
Luckily, we can fix that with a minor tweak: the PEGY ratio.
Here's how it works:
PEGY = P/E / Estimated Long-term Growth + Yield
It's that simple. Say you have a stock with a P/E of 10, a
long-term growth estimate of +15% and a yield of 5.0%. This means
the stock has a PEGY of 0.5. As with regular PEG, any value under
1.0 is worth looking at. In this case, a value of 0.5 is extremely
With these factors in mind, I recently asked the StreetAuthority
research team to look for undervalued growth/yield value stocks
with the following criteria:
- Traded in the United States
- Market cap of at least $250 million
- Positive trailing twelve-month earnings per share (
) (to ensure profitability)
- PEGY below 1.0
- Dividend yield beating the S&P 500's average of 1.8%
Here's what turned up:
Company Name (Ticker)
|PP&L Corp. (
|Assurant Inc. (
When we talked about commodity bargains last week,
Diamond Offshore (
, was at the top of my list. The very next day, President Obama
announced plans to open 480,000 square miles of costal waters for
offshore oil exploration. Offshore drilling stocks (Diamond
included) jumped and, thanks to rising oil prices, have rallied
since then. (To read my analysis of Diamond, click here).
Hudson City Bancorp (Nasdaq: HCBK)
, the largest savings and loan bank in the United States, merits
further investigation as well. In July last year, I called Hudson
City "The Best-Managed Bank in America."
Hudson City steered clear of the worst of the financial crisis by
focusing on what it does best: writing "jumbo" mortgages for
wealthy customers with low credit risk. A full 98% of its loans are
secured by first liens, meaning it has first claim to the property
should the mortgage holder default. Less than 2% of its loans are
noncurrent, or haven't been paid in the last 90 days.
Hudson City stayed away from subprime mortgages, car loans and
credit cards -- it also took zero TARP money during the credit
crisis. And for this commendable performance, shares rallied more
than +60% after plunging to the $8.50 range in March 2009. That
still leaves the stock off the $18 to $20 a share price tag it
commanded in 2008. Hudson City has remained relatively flat during
the overall market's recent rally, but could regain its previous
levels once stability returns to the overall housing market. In the
meantime, income investors can enjoy Hudson City's respectable 4.0%
dividend yield .
Disclosure: Brad Briggs does not own shares of any security
mentioned in this article.
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