With many believing the overall U.S. equity market is at fair valuation, it has been more difficult to stocks that continue to offer attractive valuations. When a bullish chart pattern is also required, it makes the search that much more daunting.
There are a number of ways to calculate valuation of a stock, from the P/E ratio to the price-to-book number. A favorite for taking into considering the current valuation based on earnings as well as future growth is the PEG ratio. Taking the current P/E ratio and dividing it by the expected future growth of earnings equals PEG ratio. Any reading of this ratio (PEG) that is below 1.0 is considered highly undervalued.
When analyzing the sectors for the most attractive P/E ratios, the financial stocks lead the way with a reading below 14.0. The reason for the low number is that the black cloud from the 2007 financial crisis still looms over the sector. The fear of another bubble bursting as well as higher interest rates have investors discounting the potential upside in the sector.
By concentrating solely on the P/E ratio and not growth, an investor is not getting an accurate view of what the valuation of a sector or stock. Therefore by bringing in growth and analyzing the PEG ratio of the stocks in the finance sector it allows for a true measure of valuation.
A recent scan of the sector generated a number of finance stocks that have PEG ratios under 1.0, but when a bullish chart was added as a factor, the number of stocks fell dramatically. Two stocks that made the cut are highlighted below.
Two Undervalued Financials
Ameriprise Financial (AMP) is an asset management firm that offers products and services in the U.S. and abroad. Their products include wealth management, annuities, and brokerage services to name a few. The increase in the value of the stock market coupled with the resurgence of the individual investor has been boosts to the company's earnings.
The PEG ratio is an attractive 0.68.
In its most recent earnings report the company reported earnings per share of $1.69, beating estimates and a 50% increase from one year earlier. Net revenue rose by 8.7% from last year. Due to market appreciation and an increase in client inflows the assets under management rose 6.3% in the quarter and assets under administration spiked 12.9%; both from the same quarter last year.
It is also important to note that over the last quarter the company returned $488 million to shareholders through dividends and share repurchases ($380 million). The current dividend yield is 2.4%.
Technically the stock has been a big winner in 2013, gaining 41% as it hit a new all-time high in early August. A recent pullback has the stock once again at a level that is attractive as it sits above its uptrend line and the 50-day moving average.
Principal Financial Group (PFG) is a diversified financial company that offers products and services that include retirement services, mutual funds, and insurance. Even though PFG is similar to AMP, the company offers a more diverse business model.
The PEG ratio is 0.90.
Net earnings for the second quarter came in at 91 cents per share, an increase of 30% from last year. Operating income rose by 29% year-over-year to $271.4 million. Operating revenue increase by 8% to $2.31 billion. The company's assets under management came in at $450.6 billion, up 22.7% from last year.
The company has been focusing more on fee-based services, which helped boost revenue along with an increase in premiums. The dividend was raised by 13% and the yield is now 2.4%.
The stock is up 48% in 2013 even though it is trading 6% off its multi-year high set in early August. Technically PFG is trading above its uptrend line and 50-day moving average and the recent pullback appears to be a long-term buying opportunity.
Buying on Healthy Pullbacks
Both stocks have been stock market darlings in 2013 as they have easily outperformed the broad market and their sector. The recent pullback in the market and the finance sector has brought the price of the stocks back to reasonable levels that offer buying opportunities for investors.
The key to entering new positions in a strong bull market is to be patient and look for what can be termed healthy or normal pullbacks in the stock price. Today both PFG and AMP are offering investors healthy pullbacks to begin building long-term positions.