Some minor stabilization crept in at the end of Monday’s session but there’s no incentiv...
PEG Picks for Growth and Value
02/24/2014 10:00 am EST
Stephen Quickel concentrates on a limited group of high growth stocks trading at reasonable valuations; the editor of US Investment Report explains his strategy and highlights a trio of current favorite ideas.
Steve Halpern: We are here today with Stephen Quickel, editor of US Investment Report. How are you doing, Stephen?
Stephen Quickel: Just fine, thank you, Steve.
Steve Halpern: First, let's look at your rather remarkable record—$100,000 invested in your conservative growth portfolio, back in 1997, would have grown to $13 million over the following 15 years, using a strategy that concentrates on a small number of stocks. That seems to go against the idea that an investor should be widely diversified. Could you expand on that strategy?
Stephen Quickel: Yes, it's a strategy we've used for a long, long time. I would suggest that most mutual funds are overly-diversified so that they, kind of, negate the growth of the best stocks they can pick, by indulging in over-diversification.
We have three model portfolios. We restrict them to about 15 to 17 stocks each, at the maximum size, and we concentrate exclusively on leadership growth stocks, stocks whose companies are leaders in various sectors and have earnings growth that's superior, in the 18% to 20% and up range per year, and we concentrate on those instead of trying to be broad and diversified.
We call it effective diversity because we do cover, at any given time, six, eight, maybe even ten different sectors of the market, so we are not undiversified, but we are certainly not over-diversified. We are effectively-diversified.
Steve Halpern: Now, you're just as focused on preserving capital, as well as you are on keeping gains. Could you explain the role that stop-losses have in your long-term strategy?
Stephen Quickel: Yes, yes, I've wrestled with this when I first started the US Investment Report. What's a good sell discipline? And instead of trying to outguess the market, we tended to rely very heavily on stop-loss limits, which we set on every stock in our model portfolios and on our recommended list.
And we advance those stop-loss limits as the price of the stock rises, usually sometimes on a daily basis, but certainly on a weekly basis, so there's always a protective floor underneath the price of the stock.
Generally speaking, our stops are somewhere in the 7% to 8% range, and that may seem tight to some people, but it seems to work well for us and it's spared us a lot of runaway losses in stocks that suddenly headed south, and this has enabled us to lock-in gains that we already had on paper.
It's really been a key factor in the kind of performance that we've been able to run up over, close to 30 years of publication now.
Steve Halpern: Now when I read your letter, I notice that you often assess stocks based on what's called the PEG ratio. Could you explain what that is to our listeners and how it plays a role in your strategy?
Stephen Quickel: Yes, indeed, I'd be happy to. The price earnings ratio—PE ratio—is kind of a traditional way of evaluating the evaluation of stocks, but it doesn't always take into account that some companies are a lot more profitable and are growing earnings a lot faster than other companies.|pagebreak|
And we're concentrating on the kinds of companies that are growing earnings the fastest of all. We want to relate the PE ratio to the growth rate of earnings that's expected from a stock.
With a PEG ratio, we're looking five years ahead, at what we think earnings are going to do per year, for the next five years, and we relate that to the PE ratio and that's what we call the PEG ratio, PE to growth ratio.
Steve Halpern: Now, could you walk us through a few examples of stocks, based on this analysis, that you currently find attractive?
Stephen Quickel: Yes, yes, yes, well, talking about PEG ratios, one of the more attractive stocks around right now happens to be our old friend Apple (AAPL), which you can buy for almost a song on the market, with earnings expected to grow very close to 20% a year.
The earnings growth has not been cut back and the PE ratio is only about 11, so it sells at a very attractive PEG ratio right now and the company, very wisely, has been taking advantage of this, no matter what it's doing on the innovation front and coming up with new products.
They've had a very smart share buy-back program, which they upped from $10 billion to $60 billion last spring and they mostly carry it out. They're buying their own stock back on the cheap and it's paying off for the long-term investors in the company in a very satisfactory way.
Another stock that I particularly like, on a PEG ratio basis, is Actavis (ACT), which has grown up as a generic drug maker, but it just announced an acquisition this past week of Forest Labs, which is a rather large and well-established global competitor in ethical drugs.
Actavis is kind of remaking itself, reinventing itself as, not just a generic drug company, but as a broad-based full line pharmaceutical company. It's a very smart move, just announced in the past week.
Actavis is trading at about a 13 PE ratio right now, earnings growth is—before Forest Labs added—earnings growth was expected to be about 19% a year, so it's got a very attractive PEG ratio situation, as well. I don't know how much more time we've got, but I can mention one more stock.
Steve Halpern: Yes, certainly.
Stephen Quickel: That I like a good bit, which is Spirit Airlines (SAVE), a small Florida airline, pretty tiny, up and coming, barged into 25 new markets during 2013 alone, and they've come up, just this morning, with a really bang-up quarterly earnings report, with earnings up 110%.
Their strategy in the airline business is a low-fare strategy and they cut cost to the bone. You're not going to get served free cocktails on Spirit Airlines.
But they're very efficient in terms of maximizing revenue per seat mile, and minimizing costs, and cutting fuel costs, and, as I say, their lowest prior fare strategy has definitely been paying off for them and they seem to be a pretty well-run company.
Steve Halpern: Well, thank you for taking the time today. We appreciate your insights.
Stephen Quickel: Okay, very good. Thank you for asking me.
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