The PEG ratio -- P/E to growth ratio -- is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E because it also accounts for growth. A lower PEG ratio means that the stock is more undervalued. Many investors consider a PEG ratio of 1.00 as a fair value. A PEG ratio way below 1.00 means very undervalued stocks.
I have searched for very profitable companies with strong growth prospects in the consumer discretionary sector with a very low PEG ratio. I have elaborated a screening method, which shows stock candidates following these lines. Nonetheless, the screening method should only serve as a basis for further research.
The screen's formula requires all stocks to comply with all the following criteria:
1. The stock is included in the Russell 3000 index. Russell Investment explanation:
The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell 3000 Index is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected.
2. Average annual earnings growth estimates for the next five years is greater than 17%.
3. Price to free cash flow is less than 12, (many investors prefer using free cash flow instead of net income to measure a company's financial performance, because free cash flow is more difficult to manipulate. Free cash flow is the operating cash flow minus capital expenditure).
4. Trailing P/E is less than 12.
5. Forward P/E is less than 12.
6. The PEG ratio is less or equal 0.50.
7.Debt to equity is less than 0.40.
After running this screen on December 21, 2012 before the market open, I obtained as results the three following stocks:
Corinthian Colleges Inc. (NASDAQ:COCO)
Corinthian Colleges, Inc. operates as a post-secondary education company. It offers various diploma programs, as well as associates, bachelors, and masters degrees.
Corinthian Colleges has very low debt (total debt to equity is only 0.20), and it has a very low trailing P/E of 8.76 and even a lower forward P/E of 5.52. The PEG ratio is also very low at 0.50. The price to free cash flow for the trailing 12 months is extremely low at 2.70, and the average annual earnings growth estimates for the next five years is quite high at 17.60%. On October 31, Corinthian Colleges reported its 3Q financial results (here), which beat expectations on EPS and on revenues. Results for the quarter exceeded the company's most current guidance ranges for revenue, earnings per share and new student enrollment growth. The cheap valuation, the strong growth prospects, the impressive 3Q financial results and the fact that COCO stock is selling way below its book value (price to book value is only 0.38); all these factors make COCO stock quite attractive.
Standard Motor Products Inc. (NYSE:SMP)
Standard Motor Products, Inc. manufactures and distributes replacement parts for motor vehicles in the automotive aftermarket industry.
Standard Motor Products has a very low debt (total debt to equity is only 0.20), and it has a very low trailing P/E of 7.27 and a very low forward P/E of 10.32. The PEG ratio is also very low at 0.41. The price to free cash flow for the trailing 12 months is very low at 7.86, and the price to sales ratio is also very low at 0.51. The average annual earnings growth for the past five years was very high at 40.82% and the average annual earnings growth estimates for the next five years is quite high at 17.65%. Standard Motor pays dividends, and the forward annual dividend yield is at 1.72% and the payout ratio is only 11.72%. Analysts recommend the stock. Among the five analysts covering the stock, four rate it as a strong buy. The stock price is 5.37% above its 20-day simple moving average, 11.37% above its 50-day simple moving average and 27.61% above its 200-day simple moving average, which indicates a short-term, mid-term and long-term uptrend. On October 30, Standard Motor Products reported its 3Q financial results (here), which beat expectations on EPS and revenues. Consolidated net sales for the third quarter of 2012 were $276 million compared to consolidated net sales of $236.2 million during the comparable quarter in 2011. Earnings from continuing operations for the third quarter of 2012 were $17.4 million or 76 cents per diluted share, compared to $14.1 million or 61 cents per diluted share in the third quarter of 2011. The compelling valuation metrics, the strong growth prospects, the strong analysts' recommendation, the good 3Q financial results and the fact that the stock is in an uptrend make SMP stock quite attractive.
ZAGG Inc. (NASDAQ:ZAGG)
ZAGG Inc, together with its subsidiaries, designs, manufactures, and distributes protective coverings, audio accessories, and power solutions for consumer electronics and hand-held devices primarily in the United States and Europe.
ZAGG has a low debt (total debt to equity is only 0.36), and it has a very low trailing P/E of 9.97 and even a lower forward P/E of 8.00, the PEG ratio is also very low at 0.42. The price to free cash flow for the trailing 12 months is very low at 11.74. The average annual earnings growth for the past five years was very high at 77.17%, and the average annual earnings growth estimates for the next five years is also very high at 23.75%. Analysts recommend the stock. Among the six analysts covering the stock, one rates it as a strong buy, four rate it as a buy and one rates it as a hold. The company is trading 42.21% below its 52-week high, and has 94% upside potential based on the consensus mean target price of $14.92. On December 13, ZAGG Inc. announced (here) that its board of directors has authorized a share repurchase program under which the company may repurchase up to $10 million of its outstanding common stock from time to time on the open market. On that occasion, Randy Hales, president and CEO of ZAGG stated :
The share repurchase program demonstrates our commitment to building long-term shareholder value and our confidence in the growth potential of ZAGG. Given the strong demand for ZAGG products, the expansion of our distribution, and the emergence of our brand, we see tremendous opportunities ahead.
The compelling valuation metrics, the strong growth prospects, the analysts' recommendation and the buyback program make ZAGG stock quite attractive.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in COCO, ZAGG over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.