PEG Ratio: A Time-Tested Strategy

05/25/2015 10:00 am EST

Focus: STOCKS

Stephen Quickel

Editor, US Investment Report

Congratulations are due Stephen Quickel; his US Investment Report has just reached its 30th anniversary. Here, he discusses his time-tested PEG ratio strategy and highlights four stocks with current appeal for bargain hunters.

Steven Halpern: Our guest today is growth stock expert, Stephen Quickel, editor of US Investment Report, which has just reached a milestone, its 30th anniversary of publication.  Congratulations, Steve.  

Stephen Quickel:  Well, thanks very much, Steve.  

Steven Halpern:  Now, in your anniversary issue, you note that some things have changed tremendously over the years such as the speed of trading, and information flow, and you see both pros and cons to this.  Could you expand on that?

Stephen Quickel: Yes, it’s almost nowadays that we have too much information, whereas 20 or 30 years ago, getting information from corporate sources was like pulling teeth. That’s been an improvement in a way, but one thing about having so much information available is, as I suggested a moment ago, it’s almost too much.  

It’s coming at us from all different directions and it’s often very hard, particularly for the ordinary, every-day investor to sort out the wheat from the chaff.  What’s really important here?  Along with that has come a lot of trading volatility that wasn’t present in the market 20 to 30 years ago either.  

That’s being caused by a lot of institutional trading, where the institutional investors—instead of looking two or three years down the road—are now looking two to three minutes ahead or maybe two to three milliseconds ahead at what’s going to be happening and trying to eke out small gains that way. It’s a very, very different market.  

Steven Halpern:  Even for many individual investors, they’ve shifted their time focus from looking out over coming years to—in fact—often just trading based on day-to-day movements.  

Stephen Quickel:  Yes. Yes. Our approach to investing in US Investment Report hasn’t really changed that much as a result.  We’re still examining stocks in the same manner that we did before.  

What we have to be careful of is that we don’t get trapped in or sucked into what are purely trading situations as opposed to investment situations where you’re looking for decent long-run gains.  

Steven Halpern:  Now, one metric that you consistently followed all these years is the PEG ratio, which is the price-to-earnings growth ratio.  Could you explain this measure and your thoughts on why this has remained a valuable tool of yours over these three decades?  

Stephen Quickel:  Yes.  Right.  Well, growth stocks are our specialty.  We’re not interested in value stocks, but we’re interested in stocks that can grow earnings by an average of 20% a year; hopefully, more than 20% a year going forward, as opposed to maybe 9% or 10% for the S&P 500 universe.  

For those kinds of stocks—growth stocks—simple, traditional price/earnings ratios don’t quite do the trick. They miss the element of growth.  

We’ve added that element to that by adopting the PEG ratio where we divide the current P/E ratio by the expected five-year-ahead earnings growth.

So, if the P/E ratio is 15 right now but the company is expecting 20% a year growth, it comes out with a very nice PEG ratio of somewhere in the 1.00 or lower. That’s been a very useful tool for sorting really solid growth stocks.

Steven Halpern:  Now let’s turn to some current stock ideas for bargain hunters and one issue on your radar is the footwear maker, Sketchers USA (SKX). What’s the story here?

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Stephen Quickel: Yes.  Well, they’re sort of an interesting company.  They make lifestyle footwear for men, women, and children out of Manhattan Beach in California. They are right now enjoying a period in which analysts are upping their earnings estimates for the company and it looks like they’ve got a pretty good momentum going.  

For example, their earnings for this year ending December 15 in the last 90 days have been increased from $3.86 to $4.19 a share. For next year, 2016, their earnings estimate has been increased from $4.78 to $5.28.  

Those are significant earnings estimates and this is a company that’s capable at growing earnings at a 20% rate a year. They’re on a roll right now, I guess, is the short way to sum it up.  

Steven Halpern:  Now your search for fast growth often leads you to biotech stocks, which appear in your newsletter and right now you’re bullish on Gilead Sciences (GILD).  What’s the attraction with this firm?

Stephen Quickel:  Yes. I’m particularly interested in Gilead Sciences.  The last time we talked, Steve, was in mid-February, as I recall.  

At that point, UBS had just released the downgrade report on Gilead’s prospects, and the stock took a nosedive and I remember saying that maybe this is a good buying opportunity for Gilead and, indeed, it has turned out to be that way.  

The stock had dropped from $107 to about $97, but is now back to $111 again and it’s moving right along.  

As a matter of fact, they appeared just yesterday at a UBS healthcare conference and came away with rave reviews.  I guess UBS has changed its mind and we certainly haven’t changed our mind about Gilead.

Steven Halpern:  Now, finally, you remain a fan of two leading technology stocks, Apple (AAPL) and Facebook (FB). Could you share your thoughts on these firms?

Stephen Quickel:  Yes. Right. Well, Facebook is interesting because its stock price has sagged this year. It got as high as $85 earlier in the year and then backed off to $77.

But now it’s back above $81 again and the consensus target among the gazillion analysts that are following it is somewhere in the $95 to $100 range.  Our own target is $100, which should be a nice gain from its current level of $81.  

Facebook has typically had a high P/E ratio, but it’s got the kind of growth that deserves to have a high P/E ratio. It can handle a high P/E ratio.  

Right now, out of 49 analysts covering the company, 43 of them either rate it as a strong buy or a moderate buy.  I think now is a pretty decent buying opportunity in Facebook.  

Apple? What can I say? I think it was just yesterday Carl Icahn, the activist investor, came out and he wrote an open letter to Tim Cook, the Chairman and CEO of Apple, saying that they thought the stock was worth $240.  

Well, at that point, the stock was about $127.  It’s now—let’s see, I’m just checking—it’s $130.28, headed for $240. That would be nice.  I’ll settle for a mere $200. In any event, Apple is not done innovating and it’s not done moving as a growth stock.  

Steven Halpern:  Again, our guest is Stephen Quickel of US Investment Report and, again, congratulations on reaching the 30-year mark for your newsletter. Thank you for joining us today.  

Stephen Quickel: Thank you very much.  My pleasure.

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