Quickel's Picks: Price to Earnings Growth

02/18/2015 10:00 am EST

Focus: STOCKS

Stephen Quickel

Editor, US Investment Report

Stephen Quickel looks for high growth stocks, but is only buying when the shares offer value relative to their growth rates. Here, the editor of US Investment Reports looks at a number of favorites, ranging from high tech to biotech to a less obvious growth candidate in appliance manufacturing.

Steven Halpern:  Joining us today is Stephen Quickel, growth stock expert and editor of US Investment Report.  How are you doing today, Stephen?

Stephen Quickel:  Just fine, thanks Steve.

Steven Halpern:  Well, thank you for joining us.  To find stocks on your buy list you look beyond just growth.  You also want to make sure you’re paying the right value for that growth, and to do this, you focus on a metric known as the PEG ratio. Could you briefly explain this overall strategy to our listeners?

Stephen Quickel:  Yes. A traditional price earnings ratio is inadequate for analyzing really good growth stocks because it doesn’t take into account the growth rate of the underlying earnings.  

The PEG ratio, which is calculated by dividing the traditional PE ratio by the annual rate of future earnings growth, is a much better gauge for determining what’s a good value in the growth stock area.  

A lot of the stocks that we look at have growth rates of around 20% or more, of earnings 20% to 25% a year, and they’re selling at PEs of 15% or 16%, which might seem a little high except when you figure that those earnings are going to be rising by 20% or 25% or even more.  That’s why we very much rely on PEG ratios to determine value.

Steven Halpern:  Apple (AAPL) has been particularly strong so far this year and it’s always a popular stock with investors, but this caused you to look at some secondary stocks that might be beneficiaries of Apples success.  Now, one of those is Skyworks Solutions (SKWS).  Could you explain a little about the company and your outlook for it?

Stephen Quickel:  Skyworks has been going great guns.  They make some of the guts that Apple uses in its products and in the semiconductor area and the price of the stock has zoomed from about $45 to $80 just since the middle of October.

It’s been one of the stars of the market as Apple has risen from the $90s when they split last year up to, well, it was $120 the other day, now it’s up at around $127.  

Skyworks is sort of riding along with them, but you have to wonder, is it going to run out of gas?  Is it getting overextended?  I don’t see signs of that happening right now.  

Getting back to what we talked about on the PEG ratio a few minutes ago, the analysts who are tracking Skyworks figure around 21% of the year earnings growth over the next five years.  

That will be 21% a year and the PE ratio of the stock is around 17 or 18.  It’s got a lot of growth, selling at a relatively modest PE ratio in view of that growth.  Also, it’s got plenty of support on the street.  

Out of 21 analysts who are following it, 19 of them rate it either a moderate buy or a strong buy, so I think Skyworks, although it may seem overextended or extended—maybe I should subtract the word over—I think it’s still got some legs.

Steven Halpern:  Now, another company that could benefit from Apple’s growth is Qorvo (QRVO), which many investors may not be familiar with.  What’s the attraction here?

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Stephen Quickel:  This is a newly created. This is an excellent semiconductor merger that went into effect as of, I believe, January 1 of this year.  The merger between RF Micro Devices and TriQuint Semiconductor, two stocks that are pretty well known to technology investors.  

They got together. They found a shell company called Qorvo and they’ve lumped these two companies into and started doing business as a company with two prongs operating more or less separately, but their technologies complement each other.  

What interested me also was that they came out with their first quarterly earnings report as a merged company the other day and the earnings beat all the estimates. They raised their guidance and the stock went down 7%.  I don’t understand that, but it looks to me like a buying opportunity.  I think Qorvo could be a very interesting play and they too are making some of the stuff that Apple is using in its successful products.

Steven Halpern:  Now, given your focus on consistent and strong growth, it’s not uncommon for the leading biotechs to appear on your buy list and one that you highlight is Gilead Sciences (GILD).  What’s the outlook here?

Stephen Quickel:  Yes. Gilead’s gotten knocked around a little bit, and an analyst at Credit Suisse just a week ago today, took it from an outperformed rating down to a neutral rating and the stock dove from about $105 to about $95 in just a few days, but it started to work its way back. It’s now back to $101 again.  
Here’s a company, again, with an excellent PEG ratio, projected earnings growth by the analysts tracking the stock is a little over 25% a year for the next five years, and the PE ratio is guess what? Ten, only ten.  Again, I think this is an opportunity, it is more of a buying opportunity than anything else.

Steven Halpern:  Now, one stock on your list is Whirlpool (WHR).  On the surface, it seems to stand apart from your typical growth stock.

Stephen Quickel:  Yes, yes.

Steven Halpern:   What happened here that caught your attention:

Stephen Quickel:  Well, I think the last time we chatted, Steve, Whirlpool was—well it’s had a 50% move since the last time we talked—which was around Halloween, I think.  Now here we are on Friday the 13th, another spooky day (laughs), and, and it’s a little above $200.  I think it can go to $300.  

The reason I think so is that if you look at its PE ratio, which is about 14 right now, and it’s earnings growth, which is about 23.5% a year based on the estimates of the analysts following the stock, do a little multiplication and you can very easily come out with a $300 price tag on this stock.  

Now, this is a big old company, well it’s not that old.  It was started in 1955; that may seem old to some people. But it’s huge.  It’s the world largest maker of appliances.  It’s got manufacturing square footage of about—I think I saw a figure just the other day—it’s 65 million square feet of manufacturing.  They make a heck of a lot of refrigerators and washing machines and brand names like Kitchen Aid, their own name.  

It’s pretty much of a juggernaut and they’ve got a lot of credibility on Wall Street right now.  They’ve really delivered.  It’s kind of a really interesting situation that an old line company like that out in the Midwest is just knocking the lights out.

Steven Halpern:  And it’s not just a play on the domestic market, correct? These are really just some people exposure to global markets and emerging markets.

Stephen Quickel:  Oh yes, yes.  Very definitely.
 
Steven Halpern:  Well, we really appreciate you taking the time, today.  Thanks so much for joining us.

Stephen Quickel:  Well, my pleasure.  Thank you.

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