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3 Stocks with Magic PEG Ratios - Investment Ideas

For generations, value investors have looked to the price-to-earnings ratio, or P/E, 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".

With the S&P 500 and the Dow Industrials trading at or near record highs, you might think it would be hard to find ANY value but it does still exist if you dig deep.

Screening for PEG

I created a screen for PEG ratios under 1.0 on Zacks free Custom Screener .

Just this one criteria gave me 340 stocks. That's not too shabby.

But that doesn't mean all 340 companies are necessarily the companies I want to be buying right now. A list that big is somewhat unruly and isn't small enough to give me the truly best companies.

Therefore, I eliminated companies that had a Zacks rank of 4 or 5, which are Zacks Rank Sells, and only searched for Buy ranked stocks which are Zacks Rank #1 (Strong Buy) or #2 (Buy).

That screen gave me 81 results which was more manageable.

I decided to add another layer of value on top of that screen, though, because I wanted to find the very top value stocks, which also have growth.

Therefore, I also searched for companies with a price-to-sales (P/S) ratio under 1.0. Companies with a low P/S are usually undervalued compared to the rest of the market.

While companies can find a penny here or there for the earnings component of a quarterly earnings report, it's hard to fudge sales numbers.

Adding the P/S ratio under 1.0 gave me 29 stocks.

3 Stocks with Magic PEG Ratios

While there were a lot of great names on the final list, the following 3 companies stood out because they have both stellar fundamentals, including a low PEG ratio, and a solid business story, including strong earnings growth.

It's rare to find companies that have both value and growth in this bull market. You have to get them while you can.

  1. American Axle & Manufacturing Holdings, Inc.
  2. Hawaiian Holdings Inc.
  3. Wabash National Corporation

1. American Axle ( AXL )

American Axle makes driveline and drivetrain systems, including chassis systems and electric drive systems for light trucks, sport utility vehicles, passenger cars, crossover vehicles and commercial vehicles.

The auto industry has been strong since the recession ended, with North American production now past its pre-recession highs.

Headquartered in Detroit, American Axle has global operations but the vast majority of its sales are in North America, so currency translation wasn't a big issue in the quarter.

American Axle also has a strong light truck business and truck sales have remained red hot in North America.

Total sales rose 12.8% to $969.1 million from $858.8 million a year ago as non-GM sales jumped 14.3% year over year.

American Axle has nearly perfect value and growth fundamentals. It's P/E is well under its industry and the S&P 500 and it is expected to have double digit earnings growth this year.

PEG = 0.9

Forward P/E = 8.8 v Industry = 12.4

Expected Earnings Growth in 2015 = 20.6%

P/S ratio = 0.5

Zacks Rank #1 (Strong Buy)

2. Hawaiian Holdings ( HA )

Hawaiian Holdings is the parent company of Hawaiian Airlines which is the longest-serving airline in Hawaii. In operations for 86 years, Hawaiian provides 160 daily flights between the Hawaiian Islands and 200 daily flights system-wide.

It flies to 11 U.S. mainland cities and also internationally to Japan, South Korea, China, Australia, New Zealand, American Samoa, and Tahiti.

Hawaiian had record results in the first quarter, even though it is historically its weakest quarter, due to low fuel prices and strong demand which offset the rising dollar.

With the US economy strengthening, more people are traveling, with Hawaii still high on the list. Hawaiian has been adding routes, including key non-stops as far east as New York City.

Additionally, with the middle class expanding in China, Hawaii will play an even larger role as a destination for those travelers.

Hawaiian is perfectly situated to cash in on the current travel boom.

In April, boosted by the solid first quarter, the company announced a $100 million share repurchase program.

Despite a surge in the shares, Hawaiian is still cheap compared to both the S&P 500 and the airline industry. 2015 is expected to be a stellar one for earnings growth.

PEG = 0.3

Forward P/E = 8.7 v. Industry = 10.8

Expected Earnings Growth in 2015 = 84%

P/S ratio = 0.6

Zacks Rank #2 (Buy)

3. Wabash National ( WNC )

Wabash National makes semi trailer and liquid transportation systems, specializing in dry freight vans, refrigerated vans, platform trailers, liquid tank trailers and intermodal equipment.

As the economy has improved, so have Wabash National's sales.

The first quarter was the best first quarter in the company's 30 year history with sales jumping 22% to $438 million. Gross profit margin also rose to a new Q1 record of 13.1% from 11.9% in the fourth quarter.

It has a record backlog of $1.2 billion and expects 2015 to be its fourth year of record performance.

It raised full year shipment and earnings guidance. What other company has done that this earnings season?

PEG = 0.6

Forward P/E = 12.6 v. Industry = 12.4

Expected Earnings Growth in 2015 = 33%

P/S ratio = 0.5

Zacks Rank #1 (Strong Buy)

The Power of the PEG

A company that has both value and growth is a rare combination, especially as this bull market ages. But that's why Benjamin Graham used the PEG ratio. He knew most average stocks wouldn't qualify.

But you're not limited to just these three stocks. There were 26 others that met my strict screening criteria that also had cheap valuations and big growth.

Investors who base their decisions on fundamentals know that the PEG is one of the most potent weapons in their arsenal. Don't be afraid to use it.

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Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Insider Trader and Value Investor services. You can follow her on twitter at @TraceyRyniec .

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WABASH NATIONAL (WNC): Free Stock Analysis Report

HAWAIIAN HLDGS (HA): Free Stock Analysis Report

AMER AXLE & MFG (AXL): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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