Introduction
Low PEG Ratio stocks can offer good values with reasonable growth prospects. This was one of the favorite metrics used by Peter Lynch of the Fidelity Magellan fund. When applied to the large cap stocks, this is likely to return us names that may be temporarily mis-valued. Although chances of finding great undervalued stocks this way are not very good, the stocks that we do find have other qualities that may make them appropriate for consideration
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Screen Details
This screen looks for large cap stocks above $5 billion in market capitalization with good valuation based on Book Value and Earnings multiples and a low PEG ratio. A PEG ratio under 1 is considered low. Dividends and other attributes are of no consideration in the screening (although you will look at other attributes in your further due diligence):
- PEG ratio, forward < 1
- PEG ratio, trailing < 1
- Price/Book Ratio < 2
- Price/Earnings Ratio < 12
The Screen Results
Stock | Company | PEG Forward | P/B Ratio | P/E Ratio |
|---|---|---|---|---|
AL | Air Lease | 0.4 | 1.0 | 9.2 |
ALLY | Ally Financial | 0.5 | 0.8 | 7.9 |
C | Citigroup | 0.7 | 0.9 | 9.8 |
CS | Credit Suisse Group | 0.4 | 0.7 | 11.2 |
ESNT | Essent Gr | 0.9 | 1.9 | 10.1 |
ET | Energy Transfer | 0.5 | 1.6 | 10.9 |
FCAU | Fiat Chrysler Automobiles | 0.2 | 1.0 | 9.7 |
FITB | Fifth Third Bancorp | 0.8 | 1.1 | 9.7 |
HST | Host Hotels and Resorts | 0.6 | 1.6 | 11.3 |
JBLU | JetBlue Airways | 0.4 | 1.2 | 10.3 |
PRU | Prudential Financial | 1.0 | 0.6 | 9.5 |
SBNY | Signature Bank | 0.9 | 1.4 | 10.9 |
SYF | Synchrony Fnl | 0.7 | 1.5 | 6.5 |
UNM | Unum | 0.9 | 0.6 | 5.8 |
Notes and Observations
At this time in the declining interest rate environment, I am not in any particular hurry to add a bank/financial stock. As a result, I am eliminating ALLY, C, CS, FITB, SBNY, PRU, UNM and SYF from further consideration. FCAU is undergoing M&A so avoid.
- AL: Air Lease leases commercial aircraft to the airlines around the world. Most of its business is in Europe. I will like to research it further as the Boeing 737 max crisis should have created a dislocation in the market prices for aircraft leases and could be an opportunity. The valuation multiples are below the historical 5 year highs. Add for further research
- ESNT: Essent is a private mortgage insurance company. I am not very enthusiastic about the residential housing market in the next 5 years so will avoid this for now.
- ET: ET is a MLP required to payout most of its earnings to the shareholders. As a result, it has a high 9.7% dividend yield. Valuation is attractive and oil and gas prices should firm up in the coming years helping the stock value up.
- HST: Nice dividend yield. Good valuation, but with the sales growth slowing, there should be further multiple compression in the future.
- JBLU: Do not like the airline economics. Liquidity ratios are low.
Ending Note
One interesting note is that all the stocks, except FCAU and ET, sport Graham Number that is above the current stock price. From this measure, 12 out these 14 stocks are good values as well. I find AL intriguing enough to add it to my research list.
