JPMorgan (JPM) has broken out to new highs this week, but sits near a perilous technical level, writ...
06/09/2014 10:00 am EST
Stephen Quickel, editor of US Investment Report, selects growth stocks based on their PEG ratios; here, he highlights several new buy recommendations in a diverse range of industries, from telecom and biotech to social media and airlines.
Steven Halpern: We're here today with Stephen Quickel, a leading growth stock expert and editor of US Investment Report. How are you doing today, Stephen?
Stephen Quickel: Just fine, thank you.
Steven Halpern: In the past few months, you've built up a larger than usual cash position in your model portfolios and you've just recently suggested to your subscribers that it was time to start moving that cash back to work. Could you expand on that for us?
Stephen Quickel: Yes, sure. It's not so much that we think the market is about to break out to a robust rally, but the amount of cash we were holding in our model portfolios was very large, ranging as much as 85% in one of the portfolios and the lowest was at 50%.
That's too high, particularly in a market where a lot of our stocks are outperforming the averages. We've decided to take the cash positions that were built up back in March for the most part—just after the NASDAQ peaked around March 5—and start putting it back to work on a gradual basis.
Steven Halpern: Now, as part of your investment strategy, you pay a good deal of attention to the price earnings to growth ratio, which is known as the PEG Ratio. Could you explain this to our listeners and how it fits in with your overall approach?
Stephen Quickel: Yes, more and more people are looking to pay attention to PEG ratios. We started doing it back in the early 90s when we were looking for something better than a traditional price earnings ratio to evaluate the kinds of companies—the growth companies—that we were talking about in those days.
We were talking about the Intels, the Microsofts, and the Oracles, which were just coming to the fore and we needed a way to value them.
If we valued them just on price earnings ratio they looked ridiculous, but when you cast it in the light of what their long-term earnings growth was going to be, say over the next three to five years, the PE ratios didn't look quite so high, and so, we started relying a good bit in our research on evaluating PEG ratios.
Steven Halpern: Now, for listeners who may not be familiar, could you explain how you calculate a PEG ratio?
Stephen Quickel: Oh yes, yes. Take the price earnings ratio and divide it by the earnings growth rate. If the PE ratio is 20 and the company's long-term earnings growth is going to be 20% a year, you have a PEG ratio of 1.00; they're on a one-to-one basis.
Steven Halpern: Okay, now you're also very disciplined when it comes to using stop loss orders. Could you explain the reasoning behind that approach?
Stephen Quickel: Yes, indeed. Yes, indeed. It's really; we resorted to it, use it as an important sell discipline for many years on US Investment Report, which is now 30 years old, by the way.
We found it's an alternative to trying to guess when a stock has run its course. We would rather let the market action of the stock tell us when it's finished running rather than run the risk of guessing prematurely and missing the entire run of a stock.
There are a lot of people who disagree with stop loss orders but we've found them to be a very, very useful tool as far as preserving capital and guarding against run away losses when stocks suddenly head downward on an unexpected piece of bad news or something catastrophic.
Steven Halpern: Is there a typical percentage you use when you are applying the stop loss?
Stephen Quickel: We used to try to tailor it to each stock individually and what we've ended up doing in the last ten or 15 years is centering our stops at about 7.5% underneath the going market price.
Now, for a lot of people that's a little on the tight side and we admit it, and I have a feeling that a lot of our readers might set their stops at 8%, or maybe even 9%, but we find that 7.5% works for us so that's—it seems to get us out at a good time.|pagebreak|
Steven Halpern: Now, let's look at some of your individual recommendations. You are adding positions to Arris Group (ARRS) and Jazz Pharmaceuticals (JAZZ), both in your emerging growth portfolio. Could you tell us about these two ideas?
Stephen Quickel: Yes, Arris Group is based in Suwaneee, Georgia. It has about $3.6 billion in revenues from a broad range of telecommunications equipment.
I got interested in it when Comcast sent me an Arris modem to replace a definitely inferior one and it's worked beautifully, so I'm a user, as well as an investor. It has a wonderful PE earnings per share progression from $1.66 last year to $2.51 this year $3 next year.
PE ratio is only 11, the PEG Ratio is 0.45, which is way, way under the 1.00 ideal PEG Ratio and 23% a year earnings growth is forecast so, we're very much—we're very high on Arris.
Jazz Pharmaceutical is an Irish company, based in Dublin; they deal in specialty pharmaceuticals, has revenues of—it's not a huge company—$650 million.
Very successful narcolepsy drug called Xyrem and a promising pipeline, solid profits, good free cash flow, and a lower tax rate in Ireland. This stock is now at 95; the street target is 175; our own target is 190.
Another Irish company, Actavis (ACT), is a much larger Irish company specializing in hypertension, pain, sleep disorder, and contraception drugs. It's very highly thought of and perhaps a little less volatile than Jazz Pharmaceuticals.
Steven Halpern: Now in your conservative growth portfolio you've been adding to shares of Gilead Sciences (GILD) and Facebook (FB), both of which are well known leaders in their respective sectors. What are the attractions with these stocks?
Stephen Quickel: Well, I think Gilead swooned in price from $85 to $65 back in April, when they got a lot of bad publicity of their hepatitis C drug that was $84,000 per application.
In the interim, since then, people have realized that this is a really powerful company with earnings per share estimated to grow to about 28% a year with well-established product lines and the stock is now back from $65 to $82 and headed easily for $100.
The sampling of analysts; out of 27 analysts on the street, ten call it a strong buy and 13 more call it a buy, so that's 23 out of 27; pretty good backing.
Facebook, of course, has come back from its disastrous IPO of what, two or three years ago, and it has soared from the 20s up to $72 at its high last winter. It has sold off to the mid-50s in April but now it's back to $63 on what's widely estimated at 35% a year earnings growth.
Adding revenues and new income sources hand over fist. The street target is $78, ours is about $80 from today's $63. This is just a long-term growth stock. It's got to be in every growth investor's portfolio.
Steven Halpern: Another new recommendation of yours is the airline United Continental Holdings (UAL). What do you see happening for the overall airline sector and for United stock?
Stephen Quickel: Well, we're very high on the airlines, have been most of this year and, in addition to United Continental holdings, which is a brand new recommendation, we are also into American Airlines Group (AAL), Delta (DAL), Alaska Airlines (ALK), and Spirit Airlines (SAVE), a little Florida based outfit that has done quite well.
United Continental is a holding company operating the old United Airlines and the old Continental Airlines as separate companies.
The stock saw tooth down last summer while the rest of the airline industry was pretty well prospering from 50 to 39 and its PE right now is around 8, very, very, very low and at least a third of the analysts covering it think it can grow earnings at 30% to 35% a year. If you can get that kind of growth at an 8 times PE, grab it.
Steven Halpern: Well we really appreciate you taking the time today. Thanks for joining us.
Stephen Quickel: Okay, well, thank you very much for having me.
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