None of the stocks here are recommendations. Anyone examining these companies would want to continue to research the fundamentals for more information. It's a good idea to consult with a skilled investment advisor as well before making any investment decision.
">If you measure growth of earnings relative to the price being paid for those earnings at the market, then you are looking at the PEG ratio. That stands for price/earnings divided by percentage growth in earnings. So, first you need the P/E. Then, you need to divide the most recent 12 months earnings by the previous 12 months earnings. If the PEG ratio comes to less than 1, you may have found value. That's the idea -- naturally, it doesn't always lead to success but it may be a good screen to start a search.
Right now, you can find a number of stocks with that kind of PEG ratio. Here are three of them that trade on the NASDAQ:
- Finisar Corporation. The networking and communications devices company has a PEG ratio of .68 -- and less than one is good if you're looking for earnings growth relative to p/e. Finisar has a p/e of 10. The company has shown improved earnings steadily for the past five years and last year was excellent. The current ratio is 7 to 1 and long-term debt is relatively low. No dividend is paid but that's more or less standard among tech stocks in this field. Finisar's sales have dropped over the last few quarters and the stock is off its 52-week high by almost 50%.
- Micron Technology. The semiconductor/memory chips manufacturer has a PEG ratio of .25. They've been showing steady earnings without fail for the past 5 years. With a current ratio of 2 to 1 and long-term debt at less than 50% of equity, the level of borrowing seems to be under control. Micron is off from its 52-week highs by about 15%. This is another one where you don't receive any dividends. The price/earning ratio is at 7, astonishingly low, considering the market p/e sits at about 32.
- Oclaro. The semiconductor equipment maker has dropped almost 50% from its 52-week high. Most of the drop took place in early November after they reported less in earnings than expected. Nonetheless, with a PEG ratio of .49, it's interesting. Long-term debt is at zero. The current ratio is almost 4 to 1, a nice cushion. The p/e is 7, another tech stock priced at well below the market as a whole for earnings. With a short float of about 18% it's clear that some investors are more than cautious.
The PEG ratio was popularized by former Fidelity Magellan manager Peter Lynch in his 1989 book One Up On Wall Street. It's one way of measuring whether the growth of a stock is worth the price of admission. Like a lot of metrics, it's worthwhile to examine but imperfect. It's definitely one way to begin a search for potential investments as long as you take it as only a beginning.
None of the stocks here are recommendations. Anyone examining these companies would want to continue to research the fundamentals for more information. It's a good idea to consult with a skilled investment advisor as well before making any investment decision.
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