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
This screen looks for mid cap stocks above $2 billion and less than $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
PennyMac Financial Services
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. Additionally, I am not convinced that the metals have bottomed out yet and the uncertain commodities environment due to the trade war and the Chinese slowdown persists. That leaves us with KFY and SAVE.
- KFY: With full employment and possible recession, I do expect the staffing business to be soft in the near future. There will be better times and better prices to purchase KFY
- SAVE: The stock appears to be fairly undervalued and the price/graham number is at 0.6. Current ratio at 1.3 is less than we want but the stock may be worth investigating further.
Low PEG ratio screens keep turning up financial stocks in disproportionate numbers. At this time in the economic cycle, I am not very keen on financial stocks - despite the fact that some other value investors are buying into these names.