There are plenty of metrics to sort through when trying to dig up value stocks, but one in particular — “PEG” — can help you find hot growth amid the bargains.
Case in point: Qihoo 360 Technology (QIHU).
This Chinese stock has been the hottest Internet stock of the year. In 2013 alone, shares have soared nearly 170% — handily dwarfing rivals across the globe. And that has come on absolutely red-hot growth.
However, investors who haven’t jumped in yet are likely scratching their heads thanks to QIHU’s high valuation, which at a price-to-earnings ratio (P/E) of nearly 40 times expected 2014 profits, looks awfully pricey compared to its Chinese Internet peers.
That’s where PEG — or price/earnings-to-growth — comes in.
You see, as Barron’s points out, “much of Qihoo’s valuation lies within the growth value,” which is why Qihoo’s PEG — which not only factors in current earnings, but also it’s growth rate — is the better number to look at. A PEG above 1 signifies an overvalued stock, while under 1 signifies that it’s undervalued, thus QIHU’s PEG for 2013-15 of 0.5 is pretty attractive, and better than its peers’ average of 0.8.
But Qihoo isn’t the only growthy stock sitting pretty with a low PEG. Here are three other stocks that look like bargains when you consider the big growth they’re slated to post:
PEG Ratio (Five-Year Expected): 0.42
Projected Five-Year Earnings Growth: 31%
Avis (CAR) has already climbed 60% during the past year, and that’s despite a roughly 15% drop in the past three months thanks to a Q2 revenue miss and earnings plunge.
But that recent pullback should be sweet music for longer-term investors, because CAR is looking like a growthy bargain.
Yes, Avis’ earnings are slated to drop 9% this year, but that should set a nice floor for future growth. In 2014, earnings are expected to improve by nearly 27% year-over-year, and current estimates peg Avis at 31% earnings growth annually through 2018.
That big-time growth, combined with the recent selloff, has Avis shares trading at a mouth-watering PEG ratio of 0.42. That’s lower than rival Hertz (HTZ) at a PEG of 0.59, and Amerco (UHAL) — the name behind U-Haul — is trading for a PEG north of 1. (Plus, Avis also bests both Hertz and Amerco in traditional P/Es.)
No wonder analysts have a median price target of $34 on the stock right now, which translates to 25% upside.
PEG Ratio (Five-Year Expected): 0.28
Project Five-Year Earnings Growth: 60%
Siemens (SI) investors have had quite the ride during the past decade. The integrated technology company was pounded by the recession, recovered, then stumbled big-time in mid-2011 and has been moving sideways ever since. That includes this year — SI is fractionally in the red so far in 2013 amid expectations for a 10% decline in earnings this year.
As The Wall Street Journal explained this summer, Siemens has “disappointed investors in recent years with cost overruns and charges in the billions of euros.
Still, even amid those struggles, Siemens looks like a value stock. The company — which deals in the fields of industry, energy and healthcare and makes products like turbines, lighting products and even trains — is currently trading for a PEG ratio of 0.28.
Plus, Siemens did post some promising long-term signs along with its recent earnings miss. Orders improved 19% year-over-year in the most recent period thanks to major long-cycle contracts for trains and maintenance, all while order backlogs hit a new high.
That should help Germany’s No. 2 company by revenue meet the analyst consensus for a 42% jump in the bottom line next year. Toss in the 60% annual growth expected through 2018, and this so-so stock looks a lot more appealing.
The Goodyear Tire & Rubber Co.
PEG Ratio (Five-Year Expected): 0.19
Project Five-Year Earnings Growth: 41%
Last but not least, we have The Goodyear Tire & Rubber Co. (GT). Despite GT’s eye-popping 62% 12-month gain, the company still remains far off its mid-90s peak … and certainly looks like a value stock when you factor in its growth prospects.
Sure, sales fell between 2011 and 2012 and are slated to slide slightly again this year. But GT still is supposed to grow earnings by an impressive 27% during 2013, and is slated to tack on another double-digit increase the year after.
That shouldn’t be a surprise considering two factors: the recovering automotive market and the company’s global footprint.
Those two tailwinds have been helping drive Goodyear to big-time earnings beats in the three past three quarters, blowing away estimates by 58%, 50% and 95%. Meanwhile, in the most recent quarter, GT reported record operating profit in Asia and doubled its operating profit in Europe despite the region’s economic struggles, plus sales were especially strong in Latin America.
Meanwhile, Goodyear’s future growth should average 41% per year over the next half-decade. That should definitely keep GT burning rubber.
As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities. Follow her on Twitter: @alyssaoursler.