Investors wanting to quickly find a basket of stocks with high growth potential at a bargain will often use the PEG ratio. If you have two comparable companies in an industry group, a quick look at the PEG ratio will indicate which of the two has a better price point based on future growth. The formula is price to earnings divided by the annualized 5-year growth rate.
- A fairly valued growth stock should have annualized growth equal the current P/E ratio
- Less than one could indicate a relatively good bargain
This quick-pick theory of undervalued growth stocks only works when there is a 5-year growth expectation. But what about stocks not actively covered by analysts providing long-range growth targets? Are good stocks falling between the cracks just because of low coverage by analysts? How can we spot such stocks?
One simple method is to scan for stocks with the following:
- P/E under 35
- Average daily volume over 50K
- EPS growth this year over 30%
- Sales growth QOQ greater than 30%
When there are few future-looking forecasts to go by, we will look to revenue trends. In smaller and newer companies, looking at earnings trends can be misleading since these high-growth companies will often have abnormally high or missed earnings. As the company grows the earnings are more likely to stabilize. These principles from the 2009 paper by Wan-Ting Wu called The Forward P/E Ratio and Earnings Growth are being adapted to a stock screen.
Low 'Trailing' PEG Ratios With 5 Years Sales Data
- (NIV) – NIVS IntelliMedia Technology Group, Inc.
This $118 million market cap stock has a trailing sales growth annualized at 70.23%. EPS this year is expected to grow 44.31% and next year at 20.69%. The P/E ratio is only at 3.82. With earnings going up while prices go down, this Chinese electronics maker has seen a slight drop in profit margins and a steadying EPS growth of late. But with revenues climbing ever higher and dirt cheap valuations, wouldn’t this be a cheap buy with big upside potential? There is some hidden value in the R&D as well which usually goes unnoticed as intangible value.
- (EZCH) – EZchip Semiconductor Limited
Current EPS growth at 142% and revenue growth at 53.76%. Profit margins climbing and up to 27.48%, cash on hand going up as well as EPS over the past five years. Even with a PE of 31, the growth rate on this stock has maintained a historically high percent. Prices took a beating as a very short term revenue forecast was hawkish, but if you can look past a quarter or two this could be a cheap entry point.
- (NASDAQ:GPOR) – Gulfport Energy Corporation
Annualized sales growth over the past five years is 29.75%. The current PE is 25.58 and the forward PE is only 13.06. This stock is trading at 5.6x its book rate. However, EPS growth this year is expected at 113%, and next year at 80.7%. Based on previous growth and the upside to oil prices, this could make a slick play.
- (NASDAQ:ZOOM) – Zoom Technologies, Inc.
This telecommunications stock has a short ratio of 8.8%. The short-term forecast is not so rosy with an expected EPS negative growth of 22% and negative 6.3% next year. Two analysts say this is a strong buy. Revenues have went way up over the past two years, cash is up, the price to book is only 1, and the PE is 4.58. While this stock may need to work on long-term consistent earnings, based on growing revenue and low valuations (price to sales at 0.23) this makes an interesting value/growth pick.
- (NASDAQ:BDSI) – BioDelivery Sciences International
This specialty pharmaceutical stock is favorably reviewed by analysts with a fairly strong buy rating and a forecasted upside close to double the current price. PE is a lowly 1.41 partially because earnings are so low. A lot of money has been spent in R&D previously as would be expected. I can’t really include this with my modified PEG ratios based on previous sales since the actual dollar amounts are so low. But as a high-spec play, it could be OK.
- (NYSEMKT:GTU) – Central Gold Trust
This company invests in unencumbered gold bullion. While the PE looks like 5.21, and huge sales and EPS growth, this commodity based stock is not what we had in mind. Still, if you like gold, you might like GTU based on previous fundamental strength.
- (NASDAQ:HPJ) – Hong Kong Highpower Technology
This tiny cap stock of only $47 million has a PE of 8.6. Revenue growth has fallen from the high 80s last year to 32% this year. Forward PE is at 5.21, and EPS this year is expected to grow 114% and 38.6% next year. Price to sales is at 0.47. Trading above the $3.25 support, this stock makes the list too.
What is your opinion on these modified-PEG stocks with small market caps?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.