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The PEG Ratio - price/earnings to growth ratio, is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means that the stock is more undervalued.

I searched for very profitable companies with strong earnings growth prospects that pay very rich dividends. Those stocks would have to show a PEG ratio below 0.70.

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. All the data for this article were taken from Yahoo Finance and finviz.com. The screen's formula requires all stocks to comply with all following demands:

  1. The forward dividend yield is greater than 7.0%.
  2. The payout ratio is less than 90%.
  3. The PEG ratio is less than 0.70.
  4. Trailing P/E is less than 10.
  5. Forward P/E is less than 10.
  6. Average annual earnings growth estimates for the next five years is greater or equal 14%.

After running this screen on July 30, 2013, before the market open, I discovered the following three stocks:


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Hi-Crush Partners LP (NYSE:HCLP)

Hi-Crush Partners LP operates as a producer of monocrystalline sand. Monocrystalline sand is a mineral that is used as a proppant to enhance the recovery rates of hydrocarbons from oil and natural gas wells.

Hi-Crush Partners has a very low debt (total debt to equity is only 0.37), and it has a very low trailing P/E of 8.19 and a very low forward P/E of 8.26. The PEG ratio is extremely low at 0.25, and the average annual earnings growth estimates for the next five years is very high at 33.1%. The forward annual dividend yield is very high at 8.31%, and the payout ratio is at 68%.

HCLP will report its latest quarterly financial results on August 12. HCLP is expected to post a profit of $0.51. The reported results will probably affect the stock price in the short term.

The compelling valuation metrics, the very rich dividend, and the very strong earnings growth prospects are all factors that make HCLP stock quite attractive.


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Chart: finviz.com

KCAP Financial, Inc. (NASDAQ:KCAP)

Kohlberg Capital Corporation is a private equity and venture capital firm specializing in mid market, buyouts, and mezzanine investments.

Kohlberg Capital Corporation has a very low debt (total debt to equity is only 0.38), and it has a very low trailing P/E of 9.97 and a very low forward P/E of 9.06. The PEG ratio is extremely low at 0.66, and the average annual earnings growth estimates for the next five years is very high at 15%. The forward annual dividend yield is very high at 10.70%, and the payout ratio is at 84%.

KCAP will report its latest quarterly financial results in August. KCAP is expected to post a profit of $0.26 a share, a 13% rise from the company's actual earnings for the same quarter a year ago.

The compelling valuation metrics, the very rich dividend, and the strong earnings growth prospects, are all factors that make KCAP stock quite attractive.


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Chart: finviz.com

PDL BioPharma, Inc. (NASDAQ:PDLI)

PDL BioPharma, Inc. engages in intellectual property asset management and patent portfolio and related assets investment activities.

PDL BioPharma has a very low trailing P/E of 5.36 and a very low forward P/E of 4.23. The PEG ratio is extremely low at 0.38, and the current ratio is very high at 3.80. The price to free cash flow for the trailing 12 months is very low at 7.03, and the average annual earnings growth estimates for the next five years is quite high at 14%. The forward annual dividend yield is very high at 7.36%, and the payout ratio is only 38%.

The PDLI stock price is 1.68% above its 20-day simple moving average, 2.52% above its 50-day simple moving average and 10.62% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

PDLI will report its latest quarterly financial results in August. PDLI is expected to post a profit of $0.54 a share, a 4% rise from the company's actual earnings for the same quarter a year ago.

All these factors - the very low multiples, the very rich dividend, and the fact that the stock is in an uptrend -- make PDLI stock quite attractive.


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Chart: finviz.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.

Source: 3 High-Yielding Stocks With A Very Low PEG Ratio