The Street Beats Forbes in Selecting Reasonably Priced Growth Stocks

by: MyPlanIQ

Recently both Forbes and The Street have made recommendations for growth stocks that value investors will love. We recently covered the Forbes offering, which was based on the YCharts selection:

  • Allegiant Travel Company (NYSE:ALG)
  • AmTrust Financial Services, Inc (AFS)
  • Calavo Growers, Inc. (NASDAQ:CVGW)
  • Coca-Cola Company (NYSE:KO)
  • Tata Motors Ltd Tata Motors(NYSE:TTM)
  • AmerisourceBergen Corporation (NYSE:ABC)
  • Becton, Dickinson and Company (NYSE:BDX)
  • Cal-Maine Foods, Inc. (NASDAQ:CALM)
  • Darden Restaurants, Inc. (NYSE:DRI)
  • Tim Hortons Inc. (THI)

Today, we cover The Street's offering.

Scott Rothbort's investment strategy focuses on growth at a reasonable price, or GARP. To that end, he selects stocks that are selling at low price-earnings-to-growth, or PEG, ratios. He writes:

The price-to-earnings, or P/E, ratio is a measure of risk. The higher the multiple, the greater the stock price will react to changes in earnings per share. A stock sporting a lower multiple is considered safer because of the lesser impact that earnings has upon stock price. Lower-P/E tend to compensate investors by paying dividends.

The PEG ratio adjusts the P/E ratio for growth. A stock with a P/E of 16 growing earnings at 10% per year will have a PEG of 1.6. The lower the PEG, the less we are paying for future growth. The higher the PEG, the riskier the stock is because of the dual sensitivity to both changes in current earnings and future growth.

The objective for GARP investors is to seek out stocks with PEG ratios closer to 1 and avoid stocks with PEG ratios closer to 2.

His selections are

  • Apple Inc. (NASDAQ:AAPL)
  • Polo Ralph Lauren Corporation (NYSE:RL)
  • FedEx Corporation (NYSE:FDX)
  • Buffalo Wild Wings (BWLD)

We entered these funds into our system and then compared it with the Forbes (YCharts) selection and a balanced portfolio of Dividend producing ETFs.

Asset Fund in this portfolio
REAL ESTATE ICF (iShares Cohen & Steers Realty Majors)
FIXED INCOME TIP (iShares Barclays TIPS Bond)
Emerging Market VWO (Vanguard Emerging Markets Stock ETF)
U.S. EQUITY DVY (iShares Dow Jones Select Dividend Index)
U.S. EQUITY VIG (Vanguard Dividend Appreciation ETF)
INTERNATIONAL EQUITY IDV (iShares Dow Jones Intl Select Div Idx)
High Yield Bond HYG (iShares iBoxx $ High Yield Corporate Bd)
INTERNATIONAL BONDS EMB (iShares JPMorgan USD Emerg Markets Bond)
Portfolio Performance Comparison
Portfolio/Fund Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
The Streets Growth at a Reasonable Price 2011 Selections 45% 223% 22% 60% 23% 67%
Forbes (YCharts) Growth at a Reasonable Price 2011 Selections 23% 140% 11% 38%
Retirement Income ETFs Strategic Asset Allocation Moderate 21% 208% 3% 14% 6% 25%
Retirement Income ETFs Tactical Asset Allocation Moderate 15% 152% 9% 71% 11% 72%

Five Year Chart

Click to enlarge

The more detailed analysis provides more graphs and other portfolio properties.

The results show that the Street's growth offerings give higher returns with Sharpe ratios closer to the TAA of the reference portfolio. There are only four stocks, but for those looking for equities, this seems like the better choice. These have strong five year returns but there is significant volatility. This is likely only suitable for the investor who doesn't need income in the medium term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.