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PEG Picks: Fast Growth at Value Prices
11/05/2014 10:00 am EST
Stephen Quickel uses a specialized growth strategy focused on price-to-earnings growth values to select stocks for the model portfolios at his US Investment Report. Here, he looks at a trio of favorite stocks; a global appliance manufacturer, a leading biotech firm, and a fast-grower in the airline sector.
Steven Halpern: Our guest today is Stephen Quickel, Editor of US Investment Report. How are you doing today, Steve?
Stephen Quickel: Very fine, thank you.
Steven Halpern: Very good. Thank you so much for joining us. Now you cover stocks in all industries, but the common denominators for all your recommendations are a combination of rapid earnings growth along with low price to earnings growth or PEG ratios. Could you explain this strategy for our listeners who might not be familiar with your work?
Stephen Quickel: Yes indeed. We do look for stocks that are capable of generating, oh, say 18% to 22% a year or more of earnings growth on a consistent basis looking out five years. That’s about twice as fast as the average S&P 500 stock is growing, so we’re going after high growth stocks.
What we do is concentrate on those in the small portfolios where there are 15 stocks maybe instead of the 50 or 100 stocks that you find in a mutual fund, so we don’t dilute the performance of the stocks that we pick.
You ask about PEG ratios, that’s important to anyone who is analyzing growth stocks, because, often, these growth stocks still have what appear to be high price earnings ratios, but when you compare the price earnings ratios to the long-term earnings growth potential of the stock, they don’t look so expensive after all.
PEG ratio aficionados like to see a one-to-one relationship between earnings growth and the PE ratio. If the earnings growth is 16 and the PE ratio is 16, that’s a one-to-one ratio; that’s an ideal PEG ratio. If your earnings growth happens to be 20 and your PE ratio is 16, you’ve got an even more attractive stock because the earnings growth numerically exceeds the PE.
Steven Halpern: One part of your overall strategy—that was particularly important last month when the market fell so quickly—was your use of stop losses. Could you explain the importance of stops in your strategy?
Stephen Quickel: Yes, I’ve used stops…well, we’ve been publishing for about 30 years now and probably for the last 25 years I’ve been using stop-loss limits on every stock that we put into one of our three model portfolios. That saves us money when the market heads south and it prevents runaway losses.
Our stops are fairly tight. We set them about 7.5%, or so, below the current market price and we advance the stops as the price of the stock rises, so it’s always got that protection underneath it. Very rarely do we ever retreat from a stock.
Steven Halpern: Looking out over the long-term, I thought it was very interesting in your last issue you pointed out to investors that, despite market headwinds, that investors should consider stocks far and away the best investment vehicle available. Could you expand on all the reasons for that optimism?
Stephen Quickel: Well, yes, you’re getting nothing on fixed income investments right now. Short-term interest rates are zero and apparently the Fed—from their decision this afternoon—is going to keep them there.
Long-term bonds, 10-year bonds, have not been a great deal. For the ordinary investor who isn’t investing in derivatives or options, the more esoteric stuff, and that would qualify as most of our subscribers, stocks are really the best game in town, maybe even the only game in town.
Steven Halpern: Let’s look at a few individual stocks that you like right now, and one that you favor is Whirlpool (WHR). What’s the attraction there?
Stephen Quickel: For a guy who’s going after growth stocks you’d think—what’s a 100-year-old washing-machine company—how does it get into one of his portfolios? Well, the fact is Whirlpool is on a hot streak.
They are expected to generate over 35% a year earnings growth in the next five years and their PE ratio is only 12. The stock has been on a hot stock lately. It went up from 137 to 168 since June. It dipped back in the September market sellup to 142, but now it’s back at 168 and I suspect it’s headed for 180 and perhaps points north.
Steven Halpern: It’s often typical to find some leading buyer tax stocks on your buy list and one of your current ideas is Gilead Sciences (GILD). Could you share your outlook there?
Stephen Quickel: Gilead is having an interesting day. They came out with what people have described as a ‘sloppy’ third-quarter earnings report, yesterday. The stock is not reacting well. It closed at around $113 yesterday, a little over $113, and it’s been as low as $109 today. Last I looked it was back to $111.
This is a powerhouse company in the area of drug treatments for life-threatening diseases like HIV and hepatitis B and C. It’s got so much going for it. It’s an excellent example of a stock with a low PE, with a good pay ratio, very attractive ratio.
Steven Halpern: We’ve got time for one more. Could you tell us a little about Spirit Airlines (SAVE)? I know that’s another company that just recently reported their earnings.
Stephen Quickel: That’s a smaller-cap company based in Miramar, Florida. They have 200 flights a day to maybe 50 destinations in the US, the Caribbean, and Latin America. They aren’t cheap. You pay for extra services that you get onboard, but they have a very good on-time record, and as a stock they’ve just been terrific.
We’ve been riding Spirit for about two years. It had took a little bit of a swan dive with the market in late September and early October—went down from 73 to 53—but now it’s popped back up to just a little above 70 again. Again, I can see this one going at least to 80.
Steven Halpern: I’m guessing lower oil prices are a positive in this situation.
Stephen Quickel: Yes, my goodness. For all, the entire airline group—this is a small-cap airline, Spirit is—but we’re also looking at Delta Air Lines (DAL) and American Airlines Group (AAL) as pretty good stocks at this stage.
Steven Halpern: We really appreciate you taking the time to join us today. Thank you so much.
Stephen Quickel: My pleasure.
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