Most of the time, value investors look for stocks that have a
price-to-earnings (P/E) ratio that is less than theearnings growth
rate, or a
ratio below 1. For example, a stock with a P/E of 15 and an
growth rate of 20% would get a PEG ratio of 0.75 (15/20).
But these are not normal times. Right now, there are a group of
stocks in the S&P 500 with a PEG ratio below 0.5. I've rarely
seen that in my 19 years of investing. You may not be ready to wade
into this scary market just yet, but when you do, check out these
stocks. They are trading for once-in-a-generation lows in terms of
their PEG ratios.
Five stocks in particular have caught my eye. I've written about
some of them in recent months, and they all have bright
ahead of them once investors start to look down the road.
The recent market swoon appears to imply the U.S. and European
economies are headed for a deep and prolonged
. Yet economists aren't actually calling for that, instead simply
anticipating very little growth in the United States and Europe.
More tellingly, the globaleconomy is likely to do OK in 2012 thanks
to dynamic emerging economies. The
International Monetary Fund (
recently predicted the global
would grow 4% in 2012 -- even after
for all of the current headwinds in place.
If these economic forecasters are correct and a deep recession will
be avoided, then the recent selloff in bank stocks looks vastly
overdone, with many of them now selling below tangible
. Make no mistake: major banks are far healthier than they were in
2008 and 2009, thanks to protective measures taken since then to
strengthen their balance sheets and reduce exposure to bad loans.
When investors do return to bank stocks, they'll seek out the
best-run institutions. For example,
Wells Fargo (NYSE:
a favorite stock of Warren Buffett
, is back to trading levels seen back in 2004. The bank is far
larger and vastly more profitable compared to seven years ago, and
looks too cheap to ignore, trading at seven times projected 2012
profits. The PEG ratio: just 0.36.
forecasters are correct -- that emerging economies such as Brazil,
India and China are poised for continued economic expansion -- then
you need to reconsider the prospects for
, which has been steadily focusing its efforts in those areas since
the 2008 crisis ended. The bank now derives more than half its
revenue outside the United States. And its U.S. operations are in
far better shape than a few years ago. Citigroup carries $138
billion in tangible book value, yet is valued at just $82 billion.
That's quite a gap. The PEG ratio of just 0.31 is another way to
say that this stock is just too cheap.
The world's major steel producers surely carry risk. If demand
drops, then pricing usually slumps as well, dealing a double whammy
that can make some firms like
U.S. Steel (NYSE:
unprofitable every few years. But the entire sector appears
oversold, anticipating more gloom and doom than is warranted. This
is the logic behind
profile of industry leader
Arcelor Mittal (NYSE:
Yet if you believe a conservative approach is still warranted for
this sector, then check out Nucor, which has always had a clever
approach to labor costs. When business is good, its workforce gets
bonuses. When business slumps, they receive less. This helps Nucor
stay profitable in virtually any economic climate. In fact, the
company has generated positive
free cash flow
for each of the past 10 years (which is as far back as my data
goes). Even in 2009, when sales plunged 50% to $11.2 billion, Nucor
still generated $340 million in free cash flow.
The PEG ratio for this stock is just 0.32.
As is the case with Wells Fargo, this industrial firm is also in
Warren Buffett's portfolio.
I recently took a deep look at the company
, highlighting the company's vast streamlining efforts, which are
expected to boost profits at a nice clip in the next few years.
Even if analysts are wrong about the economy, and their projections
of annual 5% to 7% sales growth for Ingersoll-Rand in the next two
years is wrong, profits should at least stay flat, thanks to those
cost-cutting efforts. If so, you would need to merely shift your
analysis of the PEG ratio out another year or two, when the economy
looks better. And besides, the PEG ratio for this stock is just
Dean Foods (NYSE:
play is being overlooked by many investors. The food and beverage
company had gone on a buying binge in the last decade, acquiring a
range of dairy-related businesses. Those deals never coalesced into
one profitable platform. Per share profits peaked in 2006 at $2,
and fell by more than 75% by 2010. Part of the
woe stemmed from the fact that supermarkets sought to attract
customers by selling private-label milk at a loss.
Industry pricing has become rational again, and Dean Foods has been
able to negotiate much better terms in revised contracts. Moreover,
management has been steadily reducing both its own production costs
as well as administrative
. Analysts at Merrill Lynch see
rebounding from $0.69 this year to $0.90 in 2012 -- a 30% jump.
They upgraded their rating on the stock from "Neutral" to "Buy" on
July 22 -- the day the market slump began.
began to reflect that improving outlook earlier this summer, rising
from $10 in April to almost $14 in June. Yet the market rout has
pushed the stock right down to $8 in very short order. Merrill
Lynch sees shares rebounding back to $13 when the company's
earnings power comes back into evidence in coming quarters. The PEG
ratio is just 0.43 for this stock.
Risks to consider:
These stocks sport very low PEG ratios thanks to expectations
of strong profit growth in 2012. If the economy does meaningfully
shrink in 2012, then these forecasts will need to come down, PEG
higher. However, in many instances, this would only
that profit growth is flat -- but not negative -- pushing out the
anticipated profit growth into the next year.
Action to Take -->
for these stocks: A boring market that is no longer plunging. This
would help assure investors that these already-cheap shares are not
on the cusp of getting even cheaper. It's hard to imagine that
happening, which is why many of these stocks should be considered
very strongly for your portfolio.
-- David Sterman
The 10 Best Stocks to Hold Forever
One of these stock has plowed through 8 bear markets and has
returned over +170,000% since 1972. Every $700 you invested back
then would be worth more than $1 million right now. Today, the
company is raising its dividends, spending billions to buy back its
own shares, making smart acquisitions, and is the dominant leader
in a $30 billion market. This is just one of the 10 best "Forever"
stocks to own today.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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