Investors have sought out "GARP" stocks for decades. These investments, which represent Growth at a Reasonable Price, typically sport reasonable P/E ratios and possess superior growth prospects.
There are a variety of ways to find such a combination of value and growth, but my preferred metric is the "PEG ratio." Companies with a PEG ratio below 1.0 means the forward price-to-earnings (P/E) ratio is less than the forward earnings growth rates. (PEG is formally defined as the P/E divided by the earnings growth rate.)
So I'm going hunting for extreme PEGs -- stocks with P/E ratios less than one-fifth of the earnings growth rate, or a PEG below 0.2. The reason that number is so low: Every stock in this group has a forward P/E ratio of less than 10 and is expected to post earnings per share gains of at least 40% from the current fiscal year into the next fiscal year.
On my first pass through this screen, I found many energy drillers and financial services stocks. I've culled them from the herd, as they're subject to energy prices, interest rates and other exogenous factors that may render profit forecasts moot. What's left? We have 19 companies that sport rock-bottom valuations AND are expected to generate robust profits in the next fiscal year.
Near the bottom of the list, you'll find a grouping of airline stocks. Delta Airlines (NYSE: DAL), United Continental (NYSE: UAL), Spirit Airlines (Nasdaq: SAVE) and U.S. Airways (NYSE: LCC) all appear quite inexpensive. It's worth noting that the earnings forecasts assume current oil prices of around $100 a barrel. It appears as if these carriers could handle even somewhat higher oil prices and still remain nicely profitable. Looked at another way, any pullback in oil prices could lead to even higher profits -- and lower P/E ratios for these stocks.
Investors may be warming up to airline stocks, despite the fact that oil prices are near a 52-week high. The AMEX Airline index, which had fallen from around 45 in early 2011 to just 27 in late September, is already back up to 35. This chart is an important snapshot of what's happened with airline stocks. The downturn of 2008 forced many carriers to become very lean, and they may now be in the strongest financial shape they've been in a very long time..
A few other stocks look like solid profit rebounders in the coming fiscal year. Take Sanderson Farms (Nasdaq: SAFM) as an example. The company is one of the nation's largest chicken producers and is quickly seeing its stars align. Feed costs have begun dropping and poultry prices have been firming. That won't be much in evidence in fiscal first quarter results (which ends in a few weeks) as Sanderson is still working off its chicken feed bought in 2011 at much higher prices. Yet after that, profits may soar. Analyst think per share profits can rise more than 1,000% sequentially to around $0.95 a share in the quarter ended April. That should set the stage for more than $3.50 in EPS in fiscal (October) 2012, and perhaps as high as $6 a share in fiscal 2013. Not bad for a company that lost $4 a share in the fiscal year ended last October.
Goldman Sachs considers Sanderson Farms to be one of its top ideas (a member of what the firm calls its "Conviction Buy List") and they "encourage investors to see the forest through the trees: the wheels are in motion for a robust earnings recovery as supply cuts drive sharply higher EPS through 2013." Depending on the direction of feed prices and poultry prices, they see shares moving up from a current $52 toward a range of $60 to $75.
The set-up for mining firm Couer D'Alene (NYSE: CDE) is pretty intriguing. The company has some mines coming online this year that should help boost output of silver and other metals. That's why per share profits are expected to double to around $3 this year. Silver trades for about $30 an ounce right now, well below the high of $48 seen last spring. If silver simply made a move halfway to that former peak, to $39, then Couer D'Alenes' per share profits could move closer to the $4 mark in a year or two.
Meanwhile, shares have traded down from $36 last spring to a recent $27. Also, shares likely have solid downside support in the event that silver prices fall. The company's assets (primarily its mines) are worth roughly $2.1 billion, not far below the stock's current $2.4 billion market value.
Risks to Consider: These lofty growth forecasts are based on assumptions that the U.S. economy will stay afloat in 2012. Any shockwaves emanating out of Europe could lead analysts to lower their profit forecasts for many of these stocks.
Action to Take --> The market appears to be hitting its stride, and investors are back in a buying mood. Still, it pays to be somewhat defensive in case the mini-rally peters out. These low PEG stocks should thrive in a rising market (thanks to their high earnings growth rates) but should also hold their own in a down market (thanks to those low P/E ratios).
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