Thursday June 21, 2012
by J. Royden Ward editor Cabot Benjamin Graham Value Letter
The PEG ratio is calculated by dividing the P/E ratio by the earnings growth rate. My low PEG stock selections have consistently outperformed the stock market indexes in both advancing and declining markets.
Investing in value stocks with good growth prospects makes sense in any stock market environment. Here's three stocks with low PEG ratios: CSX Corp. (CSX), FedEx (FDX) and Johnson Controls (JCI).
CSX operates the largest rail network in the eastern U.S. Its 21,000 miles of rail link markets in 23 states and two Canadian provinces.
Coal accounted for 32% of 2011 revenues. Historically low natural gas prices and mild winter weather contributed to volume weakness during the past ﬁve quarters.
But the company’s other rail operations will more than offset lower coal shipments. An increase in volume will be driven by gains in moving intermodal containers and metals, plus strength in transporting autos.
The recent recession forced CSX to focus on improving operating efﬁciencies, which should lead to higher proﬁtability as shipments rise in 2012.
The 2.6% dividend yield is attractive, and CSX is low risk. Buy up to $21.97; my minimum sell price target is $32.46
FedEx is the world’s largest provider of guaranteed express delivery services, using a network of 50,000 ground vehicles, 688 aircraft and 57,000 drop-off boxes. It service contracts with the U.S. Postal Service provide for the air transport of Priority, Express and First Class mail.
FedEx will spend $2 billion on new aircraft to ﬂy to additional destinations. The expanded international operations will drive revenues and earnings growth in 2012 and beyond.
The increasing use of online shopping, which requires fast delivery services, will also provide a boost to revenues during the next several years.
In my view, FDX is low risk. My maximum buy price is $95.00; my minimum sell price target is $134.71
Johnson Controls supplies building controls and energy-efﬁcient management systems for commercial buildings, and makes batteries and seating assemblies for cars.
The automotive interior division has grown rapidly in recent years, while the power solutions division, the largest auto battery operation in North America, is expanding operations in Europe and Asia.
The building efﬁciency division makes building controls, which manage climate, temperature and energy. The division also makes controls for ﬁre safety and security maintenance.
The division could get a boost from the U.S. government if a program is implemented to help commercial building owners retroﬁt buildings to gain better energy efﬁciency.
Sales and earnings are recovering rapidly after weak results in 2009. Founded in 1885, Johnson Controls is a top-quality company with a very reasonable PEG ratio of 0.52.
JCI yields 2.6% and is low risk. Buy up to $35.83; my minimum sell price target is $52.11.
Learn more about this financial newsletter at J. Royden Ward's Cabot Benjamin Graham Value Letter.