By J. Royden Ward, Editor of Cabot Benjamin Graham Value Letter
From Cabot Wealth Advisory 1/26/12 Sign up for free Cabot Wealth Advisory e-newsletter
Comparing PEG ratios will provide a good measure of which stocks are undervalued and selling at bargain prices. The PEG ratio is calculated by dividing the price-to-earnings (P/E) ratio by the earnings growth rate.
A good example of a high-quality company with a low PEG ratio is Universal Health (UHS).
Universal Health ‘B’ (UHS) (Current 1/25/12 Price is 41.45; Max Buy Price is 44.07) owns and operates acute care and surgical hospitals, and behavioral health, ambulatory surgery and radiation oncology centers in 37 states.
The November 2010 acquisition of Psychiatric Solutions has provided a big boost to sales and earnings at Universal Health. In addition, the acquisition allows a better balance between acute care and behavioral health. Psychiatric Solutions has produced rapid growth, high occupancy rates, longer stays and considerably lower uncompensated care.
Universal is expanding its outpatient services to help reduce healthcare costs for patients. The company is also implementing efficiency programs to improve financial performance while enhancing patient satisfaction and outcomes. We expect sales and earnings to increase 10% and 14% respectively during the next 12 months. UHS pays a small dividend, and the PEG ratio of 0.76 is very reasonable. UHS is low risk with an S&P ranking of B+.
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J. Royden Ward
Editor of Cabot Benjamin Graham Value Letter
A lifelong investment professional, J. Royden Ward applies his 40 years of investment research, portfolio management, writing and publishing experience to his role as analyst and editor of Cabot Benjamin Graham Value Letter, which is directed to long-term investors seeking a guide to profitable value investing based on the time-tested systems originally developed by Benjamin Graham, the Father of Value Investing. A second-generation disciple of Benjamin Graham, Roy in 1969 pioneered the development of a computerized model that applied the formulas developed by Graham using a unique ranking system. Today, Roy applies his system to two models in the Value Letter.