Quickel's Picks and PEG Profits
08/27/2014 10:00 am EST
Using a strategy focused on comparing price-to-earnings ratios to company growth rates—the PEG ratio—Stephen Quickel picks well-priced, high quality growth stocks for the portfolios at his US Investment Report. Here, he discusses his strategy and some favorite investment ideas.
Steven Halpern: Our guest today is Stephen Quickel, editor of US Investment Report. Thanks for joining us today, Stephen.
Stephen Quickel: Thanks for having me.
Steven Halpern: For nearly 30 years, you followed a highly disciplined stock picking approach that’s designed to maximize gains and limit risk. Now I would like to walk our listeners through your strategy, beginning with your focus on only recommending a limited number of high quality growth stocks. Could you expand on that?
Stephen Quickel: Yes, indeed. Yes, indeed. Our objective is to be as consistent as we can possibly be in our performance from year to year and we’ve done a pretty good job in about three decades of publication now. We start off by limiting our focus to a select group of growth stocks.
Stocks that are capable of generating on average 20% a year or better earnings growth over the coming five years. Our focus is long-term on really elite growth stocks. It’s not like we’re picking numbers out of the sky or flipping coins, or anything of that sort.
We focus on long-term growth, not trading profits, but we have a short-term objective. We’d like to see maybe a 20% performance in every stock that we pick within the coming six to 12 months. We don’t always achieve that, but more often than not, we do.
In addition, Steve, we also—to ensure the high quality of the stocks that we recommend—we also include some risk controls to maximize the consistency of the model portfolios that we offer.
We offer three model portfolios in US Investment Report, and one of the ways we control risk is to use tight stop loss orders. By tight, I mean about 7.5% or so of the opening price, and then we advance the stops as the price of the stock advances, so we always have that tight stop underneath it.
That prevents runaway losses and preserves capital in bad markets, and when we do have a bunch of stop outs, as occurred fairly recently, we will sit on our cash, cumulative cash, until we sense a confirmed rally, a sharp upward movement on heavy trading volume, and in that way, we also help to minimize risk.
Steven Halpern: Now, while you’re selecting stocks, you weigh all of the typical fundamental and technical factors, but perhaps what you’re best known for is your focus on what’s called the PEG ratio. Could you explain how that’s such a critical part of your long-term investment strategy?|pagebreak|
Stephen Quickel: Yes, indeed. The key fundamental factor that we look at is long-term earnings grow and we found that with our type of stock, that the current PE ratios tend to be a little on the high side.
But, when you relate it to the kind of earnings growth that these stocks are producing—up in the 20% a year range—by using the so-called PEG ratio, they become really much better bargains than stocks that are selling for much lower current traditional PE ratios.
Steven Halpern: For our listeners who may not be familiar with this strategy, could you just give an overall explanation of what a PEG ratio is and how you calculate that?
Stephen Quickel: The two ingredients in the formula are, you divide the current PE ratio by the numerical percentage long-term growth, so that if you have a stock that is trading at 15 times earnings and it’s going to grow earnings at a rate of 20% or more a year, you’re going to have a PEG ratio that’s way under 1.00, which is the ideal PEG ratio—a one-to-one relationship is considered by PEG enthusiasts to be the ideal. Most of our stocks are 1.00 or less.
Steven Halpern: Perhaps, you’ll highlight how you put this all together in your newsletter. Would you be kind enough to walk us through a few of your recommendations so that listeners could understand where the strategy leads to?
Stephen Quickel: Yes, right, right. Well, we have some long-term winners that we’re still enthusiastic about like Priceline (PCLN), Apple (AAPL), Spirit Airlines (SAVE), Gentherm (THRM)—a heating and cooling equipment company. We have 100% gains in those four stocks and we still think they’re not at their highs yet.
Our most recent issue, we recommended HCA Holdings (HCA) which is a huge hospital chain based in Tennessee. That’s more of a conservative stock, but we expect to get good gains out of that.
We also recommended Nvidia (NVDA), which is a stock that has been battered up a little bit this year, but is now back above its 10 week moving average, and trades are around $19 now, and our target is $24 to $25 for it.
Polaris Industries (PII)—which makes off-road vehicles and motorcycles—is another recommendation, which is now priced at $150. Our target is $170 on that stock.
Steven Halpern: We really appreciate you taking the time today. Thank you for joining us.
Stephen Quickel: Okay, well, thanks for inviting me. Take care.