Seeking Alpha

Michael Michaud's  Instablog

Michael Michaud
Send Message
Michael Michaud is the founder of Invest2Success.com (http://www.invest2success.com/) and the Invest2Success Blog (http://invest2success.blogspot.com/). He has been investing and trading in the financial markets since 1989. He founded Invest2Success.com to empower individual institutional... More
My company:
Invest2Success
My blog:
Invest2Success Blog
  • Some Value Stocks That Are Better Than Some Growth Stocks 0 comments
    Jul 8, 2014 9:10 PM | about stocks: PRU, ENH, HII, TSLA, YY, MTDR, SN, VWDRY, RDNT, ENSV, ULUR

    3 Value Stocks to Trump "Growth Fever" by Zacks Investment Research

    With the equity benchmarks crossing newer milestones on various occasions this year, both the Dow Jones Industrial Average (DJIA) and the S&P 500 stock index have earned the distinction of being serial record-breakers. Markets appear to be almost relentless in their ascent, shrugging aside geopolitical tensions stemming in Ukraine and Iraq as well as a sluggish domestic recovery.

    The Bull Run is marking its 65th month, which has shown an impressive rise that began following the darkness of the last recession, and seems to be going from strength to strength. Perhaps the time has come for investors to get off the sidelines and hone their stock-picking skills once again to gain from this unusual market environment.

    Are Growth Stocks Too Rich Now?

    Growth stocks performed impressively last year as the Federal Reserve's policies encouraged investors to pump money into the fastest-growing sectors. But now with the economy seemingly improving, albeit at a sluggish pace, and corporate profits looking fairly resilient, the Fed is gradually retracting its support.

    Investors wishing to jump on the bandwagon of growth and strong return prospects should thus exercise caution. The skeptics, perhaps rightly so, are worried that the rally has stretched stock valuations beyond fair.

    Growth and momentum stocks pushing the market to its current highs, in spite of still having potential, seem too expensive to buy now. Auto major Tesla Motors, Inc. (NASDAQ:TSLA) registered over 100% earnings per share (NYSEARCA:EPS) growth last year, while the stock recorded a one-year return of over 80%. The EPS of Chinese online social networking platform YY Inc. (NASDAQ:YY) grew over 360% last year, with the share price jumping over 160% over the past year.

    Oil exploration & production stocks like Matador Resources Co. (NYSE:MTDR) and Sanchez Energy Corp. (NYSE:SN) relate the same story, as do numerous other growth companies inhabiting the pricier corners of the market.

    In fact, some high-growth companies like Vestas Wind Systems A/S (OTCPK:VWDRY) seem to have lost momentum recently, falling around 10% in the past month after recording a one-year return of roughly 220%. RadNet, Inc. (NASDAQ:RDNT), Enservco Corp. (OTC:ENSV) and ULURU Inc. (OTCQB:ULUR) have displayed a similar trend.

    Seeking Value in a Bull Market

    Perhaps the time is ripe for sluggish value stocks to hog the limelight. Going by what history suggests, value stocks are inclined to perform well in the later stages of the economic cycle. While growth stocks have historically led the front in strong Bull Markets, value stocks have typically outperformed in periods of consolidation.

    However, finding value stocks is currently a challenge for investors as valuations look stretched in almost all corners of the market after five years of bullishness. Traditional value metrics such as a low price-to-earnings (P/E) ratio compared to the overall P/E of the market are not quite adequate to unearth true value.

    Instead, we use a measure called the PEG ratio, popularized by Peter Lynch, that takes P/E ratio one step further by factoring in expected earnings growth. The PEG ratio is calculated by dividing the price-to-earnings (P/E) ratio by the growth rate. It compares how cheap or expensive a business is relative to its growth rate.

    According to Lynch, a stock with a PEG ratio under 1.0 is considered undervalued relative to its future growth prospects, implying that the market is underestimating the earnings, and/or the company is growing faster than expected. Zacks calculates PEG ratio as a company's forward P/E divided by its expected long-term growth rate.

    3 Great Value Picks

    We have shortlisted three stocks with a PEG ratio below 1 and Price/Cash Flow ratio (P/CF) less than 10. The latter indicates that the company is generating robust cash flows to justify its price and judges the market expectations of the company's future financial health. A P/CF ratio below 10 is considered to be a worthwhile metric to bank upon.

    Stocks with these features have lagged the market in terms of year-to-date price returns, and thus, possess attractive valuations. In addition, these stocks have been recently witnessing healthy upward estimate revisions and thus sport a favorable Zacks Rank.

    Prudential Financial, Inc. (NYSE:PRU)

    This leading financial services institution is a niche player in the U.S. life insurance market, boasting an extensive product portfolio. The company, witnessing robust growth in assets under management, is set to capitalize on an aging American population. It also has a significant presence in the lucrative overseas market.

    The stock lost 0.3% year-to-date. Although its shares are trading close to its 52-week high, it has a forward P/E of just 9.65x.

    PEG Ratio = 0.98
    P/CF Ratio = 8.45
    Zacks Rank #2 (Buy)

    Endurance Specialty Holdings Ltd. (NYSE:ENH)

    The Bermuda-based company is a global provider of property and casualty insurance and reinsurance. Endurance has been attempting to take over rival firm Aspen Insurance Holdings Ltd. (AHL - Snapshot Report) in a $3.2 billion bid, in order to expand its market share and create value.

    The stock lost 8.5% year-to-date. It has a forward P/E of just 8.55x.

    PEG Ratio = 0.95
    P/CF Ratio = 6.54
    Zacks Rank #1 (Strong Buy)

    Huntington Ingalls Industries, Inc. (NYSE:HII)

    The company is engaged in designing, building and maintaining ships primarily for the U.S. Navy and the U.S. Coast Guard. Last month, it acquired Houston-based UniversalPegasus International Holdings, an established player in the energy infrastructure market, in an effort to consolidate its presence in the oil and gas market.

    The company also acquired Broomfield, CO-based S.M. Stoller Corp., which provides environmental, nuclear and technical consulting and engineering services. These acquisitions highlight the company's strategy of diversifying into the energy sector from its well-established presence in military shipbuilding.

    The stock gained 6.4% year-to-date. It has a forward P/E of 12.56x, which is considerably lower than the forward industry P/E of 16.80x.

    PEG Ratio = 0.5
    P/CF Ratio = 9.07
    Zacks Rank #2

    Bottom Line

    The PEG ratio, though apparently fascinating and intuitive, is only a rule of thumb for picking undervalued stocks. Fundamentals and other qualitative aspects of the company also have an important place in the analysis as well.

    Thus, the PEG ratio, when used in conjunction with a solid Zacks Rank, rising earnings estimate revisions and robust cash flow, is a great method to find value in this overvalued market.

    Candle Charting Intensive Training

    Steve Nisons Candlestick Charting Intensive Training and Software
    for Profitably Trading Stocks Forex Futures Commodities

    Use the CandleScanner trading software to automatically scan for profitable trading setups on any timeframe. Stock forex and futures candlestick trading courses to throughly understand how to profit from candlestick chart patterns. Free newsletter and live trading webinars. Steve Nison is the authority on trading and profiting using candlesticks.

    Track n Trade Trading Software

    Track n Trade CandleStick Auto-Recognition Plug-in
    Quickly identify candlestick patterns without thinking. With Track 'n Trade, you have the ability to click, and select your favorite candle patterns, and have Track 'n Trade find, identify, and even auto-trade each signal through our famed Autopilot Trading System.

    Van Tharp Institute
    Van Tharp Institute

    Van Tharp Institute
    Investing Trading Home Study Programs & Live Seminars Workshops

    Dedicated to cutting edge, high quality professional educational investing trading programs for traders and investors providing a road map for financial freedom. The finest investing trading education in the financial universe. Dr Van Tharp is one of the orginal Market Wizards, and referred to as the Traders Coach.

Back To Michael Michaud's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.