Easy Formula to Calculate PEG Ratios
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Two Low PEG Ratio Stocks to Buy Now
Calculate PEG Ratios and Become an Intelligent Investor
A sure-fire method to find stocks that will outperform the stock market during the next year or two is to ferret out stocks with low PEG ratios and generous dividend yields.
There are several simple ways to calculate PEG ratios. I prefer to use this method because it brings the dividend into the PEG equation.
First, let’s look at the components. The inputs are simple:
* Current stock price (P)
* Latest four quarters of earnings per share (EPS)
* Estimate of how fast earnings per share will grow during the next five years (G)
* Latest annual dividend yield.
Next, compute the price to earnings ratio (P/E) by dividing the current stock price (P) by the latest four quarters of earnings per share.
Then multiply the latest quarterly dividend by four to convert the quarterly amount to the annual dividend.
Then divide the annual dividend by the current price (P) to derive the annual dividend yield (D).
Lastly, divide the P/E ratio by the combined Growth and Dividend Yield to determine the PEG ratio.
If you are using a computer spreadsheet, use the following formula to compute the PEG ratio:
PEG Ratio = SUM(P/E)/SUM(G+D)
Many investors do not include the dividend yield in the PEG ratio, but I believe my methodology is an excellent way to compare companies that pay higher than average dividends. I like to think PEG ratios, which include yields, are used by the most savvy investors.
Here are a few examples of low PEG ratio stocks that I recommended.
In the February 11, 2013 Cabot Wealth Advisory, I recommended buying Microsoft (MSFT) and Prudential Financial (PRU) which had low PEG ratios. During the past 16 months. MSFT has climbed 48% and PRU is up 56% compared to a lesser gain of 29% for the Standard & Poor’s 500 Index.
Then in the June 24, 2013 Cabot Wealth Advisory, I recommended buying Deutsche Telekom AG (DTEGY) and Fortress Investment (FIG). During the last 12 months, DTEGY has surged 51% while FIG has advanced 23%, compared to a gain of 24% for the S&P 500 Index.
High-quality stocks with low PEG ratios have consistently outperformed the stock market indexes in both advancing and declining markets. Investing in quality stocks at bargain prices makes sense in any stock market environment.
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Two stocks with low PEG ratios adjusted for dividends are Fortress Investment (FIG) and Noble Corp. (NE). Here is what I wrote about each company recently.
Fortress Investment Group (FIG: Current Price 7.86) Fortress is a leading global alternative asset manager with $62 billion in assets under management as of December 31, 2013. Alternative investments include various types of options which are often used to reduce risk. Fortress is headquartered in New York City and has affiliates with offices in major cities around the world.
Fortress invests in and manages private equity funds and hedge funds. Fortress intends to grow its existing businesses, especially its equity and fixed-income operations. FIG will also continue to create innovative products to meet the increasing demand by sophisticated investors for superior risk-adjusted investment returns.
Revenues climbed 22% and EPS soared 51% during the 12 months ended March 31. FIG’s revenues received a big boost from stock market returns and from new mutual funds. Revenues will likely rise another 9% and EPS will advance 25% to 1.15 during the next 12 months. Fortress’ stellar investment returns will attract additional capital during the next several quarters.
At just 8.3 times current EPS and with a low PEG ratio of 0.45, FIG shares are clearly undervalued. The dividend yield of 4.1% adds appeal. I recently lowered my high risk rating to medium risk, because sales, earnings, and FIG’s share price are less volatile. I expect FIG to increase to my Min Sell Price of 14.78 within one to two years. Buy FIG at the current price.
Noble Corp. (NE: Current Price 31.77), founded in 1921 and now based in Switzerland, is one of the world’s leading offshore drilling contractors. The company operates a fleet of 77 offshore drilling rigs. Four new drilling rigs will be added to the fleet during the next 15 months, which will place Noble second in the world (Transocean is first).
Noble is focused on increasing the number of deepwater offshore drilling rigs in its fleet to spur growth and take advantage of strong demand. In recent months, the permitting process in the U.S. Gulf of Mexico has improved, allowing more drilling deepwater units to operate in the Gulf.
Sales rose 21% and EPS soared 59% in the 12 months ended March 31. Noble took delivery of five new rigs during the past six months and will take delivery of two more in the current quarter. The added capacity will help boost revenues by 18% and EPS by 22% to 4.22 during the next 12 months ending 3/31/15. The addition of new rigs leasing at premium rates could boost results even further.
At 9.5 times current EPS and with an attractive dividend yield of 4.7%, Noble is clearly undervalued. In addition, Noble’s P/BV ratio is a low 0.94. Its stock price will likely rise to my Min Sell Price of 63.03 within two years. Buy NE at the current price.
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Until next time, be kind and friendly to everyone you meet.
J. Royden Ward
Chief Analyst of Cabot Benjamin Graham Value Investor
P.S. You can read more about Fortress and Noble and get continuing coverage in Cabot Benjamin Graham Value Investor. There you’ll not only find buy and sell advice for FIG and NE, you’ll also discover an ample array of stocks selling at bargain prices. In every issue, you’ll find my Maximum Buy and Minimum Sell Prices for over 275 stocks plus my up-to-date predictions for the Dow Jones Industrial Average.