By Harry Domash
Online Investing
Given recent market action, you hear a lot about stock valuation these days. For instance, “after last week’s 15 percent price drop, is so and so stock finally undervalued?
So, how do you know whether a particular stock is overvalued or undervalued? You can find many different formulas out there for calculating a stocks “fair value.”
However, most of us these days are looking for growth stocks. That is, stocks that will grow earnings at double-digit annual rates while you hold their shares.
For growth stocks, the price/earnings ratio, which compares recent share price to 12-months earnings, is the most widely-used valuation measure. The “trailing price/earnings ratio” is based on the last 12-months earnings while the “forward price/earnings ratio” uses the current fiscal year’s forecast earnings for the calculation.
However, for growth investors, the price/earnings ratio, by itself doesn’t mean much. That’s where the PEG, which compares price/earnings ratio to forecast annual earnings growth, comes into play. For example, the PEG would be 2.0 for a stock with a price/earnings ratio of 40 that is expected to grow earnings 20 percent annually.
In normal times, most in-favor growth stocks would have PEGs ranging from 1.5 to 2.0, and sometimes even higher. However, since many stocks recently suffered substantial price drops, regardless of their fundamental outlooks, there may be some bargains to be had.
With that in mind, here’s a screen for finding fast earnings growers trading at PEGs below 1.0. As usual, it uses the free finviz.com stock screener.
From its homepage, select “screener” and the “all” on the screen filters bar to see all available filters. For each filter that you want to use, use the adjacent dropdown menu to select the filter value.
Start, by specifying “Low (less than one)” for PEG, which finviz defines ad the next five-years forecast annual earnings growth divided by the trailing price/earnings ratio.
Smaller stocks are inherently riskier that larger players. So, to reduce risk, use the Market-Cap (value of all outstanding shares) filter to limit the field to midcap (more than $2 billion) stocks. Then use the country filter to specify U.S-based stocks.
Next, limit your screen to fast growers by specifying “over 20 percent” for this year’s and next year’s forecasted “EPS Growth.” Consistently profitable stocks are always your best bets. Assure that is the case for your stocks by specifying “+10 percent” for profitability gauge “Return on Equity.”
Viable growth candidates must be in-favor with major market players. Assure that is the case by specifying “buy or better” for Analyst Recommendations, and “Over 40 percent” for Institutional Ownership, which means that mutual funds and other big players hold significant positions in passing stocks.
Finally, use the Performance filter and specify “Year Up” to limit your list to stocks that, despite recent market setbacks, are still in the positive column over the past 12-months.
My screen turned up six “undervalued” candidates.
Oil and gas producers Concho Resources (ticker symbol CXO) and Matador Resources (ticker symbol MTDR), social networking kingpin Facebook (ticker symbol FB), biotech Halozyme (ticker symbol HALO), and food distributor Performance Food Group (ticker symbol PFGC).
As always, consider the results of this screen to be research candidates, not a buy list. The more you know about you candidates, the better your results.
Harry Domash of Aptos publishes the Winning Investing and the Dividend Detective websites. Contact him at www.winninginvesting.com or Santa Cruz Sentinel, 324 Encinal St., Santa Cruz, CA 95060. To see previous Domash columns, visit santacruzsentinel.com/topic/Harry_Domash.
