Value investors have long looked to the price-to-earnings ratio as a means to finding value stocks. However, Benjamin Graham, long considered to be the 'father' of value investing, found that a low price-to-earnings ratio wasn't enough to unearth the true undervalued companies.
Graham combined the low price-to-earnings ratios with the power of growth by using the PEG ratio. The PEG ratio is calculated by taking the price-to-earnings (P/E) ratio and dividing it by the growth rate.
Normally, a stock with a PEG ratio under 1.0 is considered a 'value'. However, despite the stock rally in 2012, there are quite a few stocks that are trading with PEG ratios far, far lower than 1.0.
Screening for PEG
I created a screen for PEG ratios under 0.25, which would be an extremely low PEG ratio, on Zacks free Custom Screener.
Just this one criteria gave me 44 stocks. That's not too shabby.
But all 44 companies are not necessarily good value stocks. I eliminated companies that had a Zacks rank of 4 or 5 and then considered other fundamentals such as earnings surprises, return on equity and earnings history.
3 Stocks with Low PEG Ratios and Solid Value Fundamentals
The following 3 companies stood out because they had both stellar value fundamentals, including a low PEG ratio, and a solid business story, including earnings growth.
- Grupo Galicia
- Gulfport Energy
1. Grupo Galicia (GGAL)
Banks have been out of favor. Grupo Galicia is the holding company for Banco Galicia, one of Argentina's oldest banks. It provides financial services to corporations and individuals throughout Argentina. It also is a big supplier of credit cards.
- PEG Ratio: 0.1
- Industry: 1.4
- 2012 Expected Earnings Growth: 2.4%
Grupo Galicia has a high return on equity (:ROE) of 36%, which is an important fundamental for a bank. Its peers average just 24.5%.
Additionally, shareholders get a small dividend, yielding 0.3%. Grupo Galicia is a Zacks #3 Rank (Hold).
2. Seagate Technology (STX)
Seagate manufactures hard disc drives worldwide. There have been concerns about the hard drive industry since the floods in Thailand last year hit global production. Seagate is super cheap with a forward P/E of just 4.3.
- PEG Ratio: 0.2
- Industry: 0.2
- Fiscal 2012 Expected Earnings Growth: 405.4%
Seagate is expected to have record fiscal 2012 and 2013 results. It is a Zacks #1 Rank (Strong Buy).
3. Gulfport Energy (GPOR)
Gulfport Energy is an oil and natural gas explorer and producer with operations along the Louisiana Gulf Coast, in the Permian Basin and Utica Shale. The company also has an interest in the Alberta Oil Sands. The energy stocks have been overlooked by investors over the past few months. Gulfport has a forward P/E of just 11.8.
- PEG Ratio: 0.2
- Industry: 9.8
- 2012 Expected Earnings Growth: 23.1%
Gulfport is a Zacks #3 Rank (Hold) stock.
Low PEG Ratios Are the Beginning Not the End
Seeking a low PEG ratio is a good way to begin a search for value stocks but it's not the only indicator. As outlined here, start with the PEG ratio and also screen for other fundamentals. Combined with other value indicators, the PEG ratio can be a powerful tool for value investors.
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