5 favorites: PEG values

by Stephen Quickel, editor US Investment Report

In weighing new stocks for our Recommended List while the market is correcting, we are particularly on the lookout for well-known growth companies whose shares can be bought
at lower than usual prices.  

I look mainly for two things: 1) expected long-term earnings growth over the next 3 to 5 years, and 2) PEG ratios lower than 1.10 which signal that earnings growth is equal to or greater than the forward P/E.

These are characteristics that differentiate our stock picks from the run-of-the-mill stocks. Our average stock is expected to grow earnings per share by 20.1% a year. The median is growth rate is 18.6%. The S&P 500’s earnings growth is estimated currently around 10% a year.

With our stocks expected to grow twice as fast as the S&P universe, their median PEG ratio (P/E divided by Earnings Growth) is a super-attractive 0.75.

Below are five of our new selections. They trade within 10% of their 52 week highs, so they are not exactly fallen angels.

But they are available at opportunistic prices, nevertheless. Their average forward P/E of 11.6 times 2013 earnings is even lower than S&P 500’s year- ahead P/E.

And with earnings growth expected to average 17.3 a year vs. the S&P’s 10%, their average PEG ratio is an extremely attractive 0.71. Here are thumbnails of their attractions:

Fedex Corp. (FDX), the overnight shipping leader, traded up from 68 to 96 when we recommended it last October to January. It traded back down to 88 in March before catching the tail end of the first-quarter rally and rebounding to 96.

Now, in the April-May correction, you can buy it at 88 again, with a forward P/E of 12 and a PEG of 0.79 based on expected earnings growth of 15.3% a year. Eighteen of 22 analysts rate it a Strong Buy.

Honeywell International (HON) is a highly regarded industrial conglomerate; the company is big in aerospace, automation & controls, performance materials, transportation systems and gosh knows what else.

A steady performer over the years, HON now trades around its 2007 peak of 55-60—at a P/E of 11.8, a PEG of 0.79 based on 14.8% a year expected earnings growth, with 11 of 18 analysts calling it a Strong Buy (plus 2 more rating it a Buy). Our 6- to 12-month price target is 75.

Jazz Pharmaceuticals, PLC (JAZZ), operating out of Dublin, Ireland, is a rapidly growing small-cap biotech specialist that is trading at just 10.4 times year-ahead earnings and has a rock-bottom PEG of 0.40.

At this stage in its emergence, about half its 500 million of revenues comes from a narcolepsy treatment called Xyrem. It spends about 12% of revenues on research, which bodes well for a near-future flow of new products.

Wabtec (WAB) is short for Westinghouse Air Brake Technology Corp., a long-established Pennsylvania manufacturer of railroad equipment, from locomotives to subways and busses.

With first-quarter earnings up 45%, it is expected to grow profits 15.3% a year. The P/E is 14%, the PEG 0.92, the highest of these new stocks.

We view Union Pacific (UNP) as the best-positioned railroad play as the economic recovery continues—reasonably priced with vast trackage connecting the Pacific and Gulf Coasts with the Midwest and Eastern centers.

We had an excellent ride in UNP in 2011 and, from today’s price, foresee another rise to around $130. There’s also a 2.1% dividend yield.  

Learn more about this financial newsletter at Stephen Quickel's US Investment Report.

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