Investors tend to ignore the price-to-earnings-to-growth (PEG) ratio as a valuation metric. Many turn to the price-to-earnings (P/E) ratio. The average S&P 500 P/E ratio now stands at about 22 times earnings.
Still, this ratio paints the S&P 500 with a broad brush. General Motors Company (NYSE:GM) has seen little movement at 9 times earnings. Conversely, Amazon.com, Inc. (NASDAQ:AMZN) increased by about 50% in the last 12 months despite a P/E above 310. The difference in these two stocks? Growth rates.
Hence, the PEG ratio allows investors to temper P/E analyses while taking a growth metric into consideration. The average PEG ratio for the S&P 500 has reached 1.33. However, many S&P stocks have a low P/E due to growth getting ahead of valuation.
The following 7 S&P stocks trade at a PEG around or below 1, giving you growth at a reasonable price, or GARP.
GARP Stocks: Allstate Corp (ALL)
PEG Ratio: 0.69
To be sure, an insurer such as Allstate Corp (NYSE:ALL) lacks the sex appeal of a blockchain or an e-commerce company in today’s market. However, looking more closely, Allstate stock is performing like a red-hot growth company behind its conservative veneer. The stock rose by 34% over the last year.
Growth in Allstate stock began in late 2015 when the company altered its pricing strategy. The company gained a 20% compound annual growth rate (CAGR) from this strategy. Now, the benefits have appeared in both the earnings reports and the stock price.
After years of stagnant earnings, profits grew by about 32% in 2017. Analysts forecast 26% profit growth in 2018. While growth is expected to fall to 6% in 2019, it appears that investors still have time to profit from this growth story.
GARP Stocks: Comerica Incorporated (CMA)
PEG Ratio: 0.48
Comerica Incorporated (NYSE:CMA), like Allstate, operates in a financial industry not known for its excitement. However, the financial services company has found a niche that will drive profits higher in this increasingly vibrant economy.
The stock has been on a tear for the last two years. After falling as low as $30 per share, Comerica stock began moving upward, reaching over $95 per share yesterday. A combination of operational restructuring and rising interest rates has driven profits to new highs. Analysts expect earnings per share to increase by double digits through 2020.
Despite the stock movement, this growth story may not yet have ended. Earnings per share (EPS) grew by 68%, and analysts forecast a 17.5% growth rate for earnings per share in 2018. With a forward P/E of 13.4, the PEG ratio indicates the move higher in the stock has not yet ended.
GARP Stocks: Progressive Corp (PGR)
PEG Ratio: 0.79
Most average investors will likely know Progressive Corp (NYSE:PGR) from the commercials claiming to have lower rates. However, their spokesperson Flo never mentions Progressive stock and its low PEG ratio when discussing these bargains.
However, Flo may help in other ways. Revenues have grown by an average of about 8.25% per year for the last five years. Costs had been fairly contained for several quarters during this time. The company incurred higher benefit payments in the third quarter of 2017 due to the hurricanes. However, profits remain higher overall, and investors have taken notice.
Progressive stock traded in the low $30s per share range as late as the fall of 2016. Today it trades at around $56 per share. After years of fluctuating profits, the EPS picture turned around. Analysts believe profits will rise 40% in 2017 and 23% in 2018. With a forward P/E of only 19.7 at today’s levels, the stock has to keep moving substantially higher just to bring PEG ratios to an average level.
GARP Stocks: Quanta Services Inc (PWR)
PEG Ratio: 0.85
Quanta Services Inc (NYSE:PWR), despite its small size compared to other S&P stocks, has moved higher while managing to keep its PEG ratio low.
Quanta is a provider of infrastructure solutions for the oil and gas industry. Like most energy equities, Quanta stock lost about half of its value during the 2014-16 downturn in prices. However, Quanta weathered the downturn better than most of its peers. Profits started moving much higher in 2017.
Analysts expect 41% growth in EPS for 2017 and a 29% increase in 2018. Despite, this move higher, PWR trades at 21 times earnings. Crude oil has remained above $60 per barrel. With that price, Quanta stock should continue to move higher despite the fact that it has doubled in value in the last two years.
GARP Stocks: Nucor Corporation (NUE)
PEG Ratio: 0.92
Nucor Corporation (NYSE:NUE) has shown a high level of volatility in both its revenue and profits. The Charlotte-based steel manufacturer is the largest steel manufacturer and recycler in the U.S. Nucor also operates exclusively in the U.S. Due to this status, NUE stock is now positioned for growth as the overall economy starts taking off.
Nucor stock is enjoying the strongest uptrend its seen since before 2008. In the last two months alone, the stock has risen by about 25%. An improving economy, as well as an anticipated infrastructure program, are likely helping the stock price.
Despite its 20 trailing-12-months P/E ratio, 2017 profits looked poised to come in 44% than year-ago levels. Further, analysts expect a 25% EPS increase in 2018. Both of these figures keep the PEG ratio well under 1 at the stock’s current price.
GARP Stocks: Andeavor (ANDV)
PEG Ratio: 0.55
Andeavor (NYSE:ANDV) (formerly known as Tesoro Corporation) is an independent oil company that operates in the refining, logistics, and marketing sectors.
Unlike Quanta, Andeavor stock increased in price during much of the mid-decade industry downturn. The stock has risen over 50% since April 2017. Despite the increase, the stock trades at 21.5 times earnings.
After experiencing high earnings volatility throughout the decade, Andeavor stock appears set on a path of increase.
Although analysts expect a 10% increase in EPS for 2017, they believe 2018 profits will go up by 32%. Hence, the PEG ratio is moving downward. This lower PEG ratio should keep Andeavor stock moving higher for the foreseeable future.
GARP Stocks: Molson Coors Brewing Co (TAP)
PEG Ratio: 1.00
Molson Coors Brewing Co (NYSE:TAP) had reached a PEG of 1. However, due to its increasing profit growth, the PEG ratio has remained there.
As the name implies, the company produces the popular Coors and Molson Canadian beer brands, as well as several others. In 2016, the company gained full ownership over MillerCoors. With this deal, it gained distribution rights to Miller Beer outside of the U.S. and became the world’s third-largest brewery.
Profits have struggled to grow for most of the decade on falling beer consumption throughout the world. However, nervous investors should look to Altria Group Inc (NYSE:MO) as an example. Despite decades of falling tobacco consumption, the company has increased its stock price and dividend during that time. TAP can also follow this path.
Moreover, the MillerCoors acquisition has supercharged its EPS. After years of fluctuating profits, analysts now see consistent profit growth well into the double-digits for the rest of the decade. The current P/E ratio stands about 8. However, analysts likely calculated that figure from a one-time bump in profits in 2016. Hence, the P/E will be closer to the 17 range for 2018, which happens to be about the level of the estimated profit growth for Molson Coors.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
