Value expert eyes PEG profits

by J. Royden Ward, editor Cabot Benjamin Graham Value Letter

Twenty-seven years ago, Standard & Poor’s created the PEG ratio to measure the degree to which a growth stock is undervalued. The PEG is calculated by dividing the p/e ratio by the sum of the earnings growth rate and dividend yield. A PEG under 1.00 indicates a stock is undervalued.

To find undervalued stocks, I calculated the PEG ratios for the 1,000 companies contained in our Benjamin Graham database. The three stocks featured below should produce exceptional returns during the next six to 12 months.

BlackRock (BLK) is the largest publicly traded investment management company in the world, with assets under management totaling $3.7 trillion. The 2009 acquisition of Barclays Global Investors, manager of all iShare ETFs, doubled revenues and added significant profits.

BlackRock is best known for its expertise in fixed income asset management. The company has been gaining market share, aided by its size and untarnished reputation in the marketplace.

Its asset and risk management products are designed to help banks and governments to reduce risk and liquidate troubled assets, particularly those in Europe and Asia, such as Greek debt.

Sales and earnings growth slowed during the past 12 months, but a rebound is under way. Sales will likely rise 9% and EPS will increase 11% in 2013.

BLK shares are undervalued with a PEG ratio of 0.98. BLK is low risk, share price volatility is below average, and the dividend yield is attractive at 3.0%. Buy now.

National Oilwell Varco (NOV) manufactures systems and components used in the oil and gas drilling industry. More than 90% of the mobile offshore drilling rigs manufactured in the past 20 years use drilling components manufactured by National.

Oil and natural gas companies are focusing on oil drilling and placing less emphasis on natural gas drilling because of the low prices and profits of natural gas. The switchover is creating new demand for National’s products and services.

Revenues and earnings will probably increase 13% in 2013. The acquisition of Robbins & Myers might boost sales and earnings further.

The stock sells at a very reasonable PEG ratio of 0.72. NOV pays a dividend yielding 0.8%, is medium risk, and share volatility is above average. Buy now.

Nordstrom (JWN) was founded in 1901 as a retail shoe business in Seattle,Washington. Today, the company is a leading mid-to-high-end retailer of national and exclusive private-branded apparel, shoes, accessories and cosmetics.

The company plans to add one new Nordstrom store and 15 new Rack stores -- its discount outlet -- before 1/31/13. Future new store openings will be driven by Rack, reflecting company plans to increase locations from 119 stores to over 230 stores by 2016.

Sales will likely increase 9% and earnings will rise 12% in 2013. The company’s highly profitable Rack outlet stores could provide an additional boost to sales and earnings growth.

JWN shares are reasonably priced at 15.3 times current EPS with a dividend yield of 2.2%, but I advise waiting for the stock price to decrease to my maximum buy price of $51.33 before buying. JWN shares are medium risk with average volatility. The PEG ratio is modest at 0.97.

Learn more about this financial newsletter at J. Royden Ward's Cabot Benjamin Graham Value Letter.

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