Investors have sought out "
GARP
" stocks for decades. These investments, which represent Growth at
a Reasonable Price, typically sport reasonable P/E ratios and
possess superior growth prospects.
There are a variety of ways to find such a combination of value and
growth, but my preferred metric is the "
PEG
ratio." Companies with a PEG ratio below 1.0 means the forward
price-to-earnings (P/E) ratio is less than the
forward earnings
growth rates. (PEG is formally defined as the P/E divided by the
earnings
growth rate.)
So I'm going hunting for extreme PEGs -- stocks with P/E ratios
less than one-fifth of the earnings growth rate, or a PEG below
0.2. The reason that number is so low: Every stock in this group
has a forward P/E ratio of less than 10 and is expected to post
earnings per share gains of at least 40% from the current
fiscal year
into the next fiscal year.
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On my first pass through this screen, I found many energy drillers
and financial services stocks. I've culled them from the herd, as
they're subject to energy prices, interest rates and other
exogenous factors that may render
profit
forecasts moot. What's left? We have 19 companies that sport
rock-bottom valuations AND are expected to generate robust profits
in the next fiscal year.
Near the bottom of the list, you'll find a grouping of airline
stocks.
Delta Airlines (NYSE:
DAL
)
,
United Continental (NYSE:
UAL
)
,
Spirit Airlines (Nasdaq:
SAVE
)
and
U.S. Airways (NYSE:
LCC
)
all appear quite inexpensive. It's worth noting that the earnings
forecasts assume current oil prices of around $100 a barrel. It
appears as if these carriers could handle even somewhat higher oil
prices and still remain nicely profitable. Looked at another way,
any pullback in oil prices could lead to even higher profits -- and
lower P/E ratios for these stocks.
Investors may be warming up to airline stocks, despite the fact
that oil prices are near a
52-week high
. The
AMEX
Airline
index
, which had fallen from around 45 in early 2011 to just 27 in late
September, is already back up to 35. This chart is an important
snapshot of what's happened with airline stocks. The downturn of
2008 forced many carriers to become very lean, and they may now be
in the strongest financial shape they've been in a very long
time..
A few other stocks look like solid profit rebounders in the coming
fiscal year. Take
Sanderson Farms (Nasdaq:
SAFM
)
as an example. The company is one of the nation's largest chicken
producers and is quickly seeing its stars align. Feed costs have
begun dropping and poultry prices have been firming. That won't be
much in evidence in fiscal first quarter results (which ends in a
few weeks) as Sanderson is still working off its chicken feed
bought in 2011 at much higher prices. Yet after that, profits may
soar. Analyst think per share profits can rise more than 1,000%
sequentially to around $0.95 a share in the quarter ended April.
That should set the stage for more than $3.50 in
EPS
in fiscal (October) 2012, and perhaps as high as $6 a share in
fiscal 2013. Not bad for a company that lost $4 a share in the
fiscal year ended last October.
Goldman Sachs considers Sanderson Farms to be one of its top ideas
(a member of what the firm calls its "Conviction Buy List") and
they "encourage investors to see the forest through the trees: the
wheels are in motion for a robust earnings recovery as supply cuts
drive sharply higher EPS through 2013." Depending on the direction
of feed prices and poultry prices, they see
shares
moving up from a current $52 toward a range of $60 to $75.
The set-up for mining firm
Couer D'Alene (NYSE:
CDE
)
is pretty intriguing. The company has some mines coming online this
year that should help boost output of silver and other metals.
That's why per share profits are expected to double to around $3
this year. Silver trades for about $30 an ounce right now, well
below the high of $48 seen last spring. If silver simply made a
move halfway to that former peak, to $39, then Couer D'Alenes' per
share profits could move closer to the $4 mark in a year or two.
Meanwhile, shares have traded down from $36 last spring to a recent
$27. Also, shares likely have solid downside support in the event
that silver prices fall. The company's assets (primarily its mines)
are worth roughly $2.1 billion, not far below the stock's current
$2.4 billion
market value
.
Risks to Consider:
These lofty growth forecasts are based on assumptions that the
U.S.
economy
will stay afloat in 2012. Any shockwaves emanating out of Europe
could lead analysts to lower their profit forecasts for many of
these stocks.
Action to Take -->
The
market
appears to be hitting its stride, and investors are back in a
buying mood. Still, it pays to be somewhat defensive in case the
mini-rally peters out. These low PEG stocks should thrive in a
rising market (thanks to their high earnings growth rates) but
should also hold their own in a down market (thanks to those low
P/E ratios).
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.