Quickel's PEG Value Picks

08/01/2013 7:00 am EST

Focus: STOCKS

Stephen Quickel

Editor, US Investment Report

Our latest recommendations share two primary characteristics: rapid earnings growth potential and attractive price valuations, explains Stephen Quickel of US Investment Report.

So far, the results for the second quarter earnings season look very good. Not super, but very good. More than 60% of the S&P 500 stocks reporting had bested the quarterly earnings expectations of analysts.

Many also beat revenue forecasts and upped their guidance to analysts for the near future. This bullish earnings picture, coming atop steadily improving economic news, augurs well for gains in stock prices to resume.

On average, our recommended stocks are expected to grow earnings per share 19.7% a year for the next three-to-five years.

They trade at an average forward P/E of just 14.8 times fiscal 2014 earnings, about the same as the far slower growing S&P 500. Their collective price-to-earnings growth (PEG) ratio is a very attractive 0.77.

In the healthcare sector, we are restoring two previously successful picks to our recommended list: Alexion Pharmaceuticals (ALXN) and pharmacy benefits leader Express Scripts (ESRX).

ALXN is an up-and-coming biotech company offering prospects of 26% a year profit growth in treatments for patients with severe and hard-to-treat illnesses. Revenues are growing rapidly.

Express Scripts, with revenues of $100 billion, is a world-class juggernaut whose large size, and somewhat moderate growth-rate, make it best-suited for conservative portfolios.

We are also adding two previously successful technology picks: Skyworks Solutions (SWKS), a supplier of analog and mixed signal semiconductors, and OSI Systems (OSIS), a specialist in mission-critical electronic systems and components.

OSIS is expected to grow somewhat faster, while SWKS trades at more attractive P/E and PEG ratios.

In the financial sectors, we are intrigued by the 25% to 27% a year earnings growth expectations for Ocwen Financial Corp. (OCN).

Ocwen, located in Atlanta, is a holding company specializing mainly in originating and servicing mortgage loans. Though not widely known, both stocks trade at rock-bottom PEG ratios.

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