For generations, value investors have looked to the price-to-earnings ratio, or P/E, as a means to finding value stocks.
However, Benjamin Graham, long considered to be the “father” of value investing, found that a low price-to-earnings ratio wasn’t enough to unearth the true undervalued companies.
Benjamin Graham combined the low price-to-earnings ratios with the power of growth by using the price/earnings-to-growth ratio. The PEG ratio is calculated by taking the price-to-earnings (P/E) ratio and dividing it by the growth rate.
Normally, a stock with a PEG ratio under 1.0 is considered a “value”.
With the S&P 500 and the Dow Jones Industrial Average trading at or near record highs, you might think it would be hard to find any value, but it does still exist if you dig deep.
A company that has both value and growth is a rare combination, especially as this bull market ages. But that’s why Benjamin Graham used the PEG ratio. He knew most average stocks wouldn’t qualify.
Investors who base their decisions on fundamentals know that the PEG is one of the most potent weapons in their arsenal. Don’t be afraid to use it.
And you’re not limited to just the three stocks we’ll discuss here. There were 26 others that met my strict screening criteria that also had cheap valuations and big growth.
While there were a lot of great names on the final list, the following three companies stood out because they have both stellar fundamentals, including low PEG ratios and solid business stories — including strong earnings growth.
It’s rare to find companies that have both value and growth in this bull market. Get these three stocks to buy while you can!
3 Stocks to Buy: American Axle & Manufact. Holdings, Inc. (AXL)
American Axle & Manufact. Holdings, Inc. (NYSE:AXL) makes driveline and drivetrain systems, including chassis systems and electric drive systems for light trucks, sport utility vehicles, passenger cars, crossover vehicles and commercial vehicles.
The auto industry has been strong since the recession ended, with North American production now past its pre-recession highs.
Headquartered in Detroit, American Axle has global operations, but the vast majority of its sales are in North America. So, currency translation wasn’t a big issue in the quarter.
American Axle also has a strong light truck business and truck sales have remained red hot in North America. Total sales rose 12.8% to $969.1 million from $858.8 million a year ago as non-GM sales jumped 14.3% year over year.
American Axle has nearly perfect value and growth fundamentals. It’s P/E is well under its industry, and the S&P 500 and it is expected to have double digit earnings growth this year.
- PEG = 0.9
- Forward P/E = 8.8 v Industry = 12.4
- Expected Earnings Growth in 2015 = 20.6%
- P/S ratio = 0.5
- Zacks Rank #1 (Strong Buy)
3 Stocks to Buy: Hawaiian Holdings, Inc. (HA)
Hawaiian Holdings, Inc. (NASDAQ:HA) is the parent company of Hawaiian Airlines, which is the longest-serving airline in Hawaii. In operation for 86 years, Hawaiian provides 160 daily flights between the Hawaiian Islands and 200 daily flights system-wide.
HA flies to 11 U.S. mainland cities and also internationally to Japan, South Korea, China, Australia, New Zealand, American Samoa and Tahiti.
Hawaiian had record results in the first quarter, even though it is historically its weakest quarter, due to low fuel prices and strong demand which offset the rising dollar.
With the U.S. economy strengthening, more people are traveling, with Hawaii still high on the list. Hawaiian has been adding routes, including key non-stops as far east as New York City.
Additionally, with the middle class expanding in China, Hawaii will play an even larger role as a destination for those travelers.
Hawaiian stock is perfectly situated to cash in on the current travel boom. In April, boosted by the solid first quarter, HA announced a $100 million share repurchase program.
Despite a surge in the shares, Hawaiian is still cheap compared to both the S&P 500 and the airline industry. 2015 is expected to be a stellar one for earnings growth.
- PEG = 0.3
- Forward P/E = 8.7 v. Industry = 10.8
- Expected Earnings Growth in 2015 = 84%
- P/S ratio = 0.6
- Zacks Rank #2 (Buy)
Wabash National Corporation (WNC)
Wabash National Corporation (NYSE:WNC) makes semi trailer and liquid transportation systems, specializing in dry freight vans, refrigerated vans, platform trailers, liquid tank trailers and intermodal equipment.
As the economy has improved, so have Wabash National’s sales.
The first quarter was the best first quarter in WNC’s 30 year history with sales jumping 22% to $438 million. Gross profit margin also rose to a new Q1 record of 13.1% from 11.9% in the fourth quarter.
Wabash National has a record backlog of $1.2 billion and expects 2015 to be its fourth year of record performance. WNC raised full year shipment and earnings guidance.
What other company has done that this earnings season?
- PEG = 0.6
- Forward P/E = 12.6 v. Industry = 12.4
- Expected Earnings Growth in 2015 = 33%
- P/S ratio = 0.5
- Zacks Rank #1 (Strong Buy)
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