Quickel's Picks: PEG Value Trio

11/15/2013 7:00 am EST

Focus: STRATEGIES

Stephen Quickel

Editor, US Investment Report

"Valuation creep" refers to the slow but steady rise in the P/E and PEG ratio levels of stocks. While not alarming, this upward "valuation creep" is now worthy of more than passing consideration by prudent investors, notes Stephen Quickel, editor of US Investment Report.

"Valuation creep" is the result of share prices rising faster than underlying earnings per share.

The average forward P/E ratio of the stocks on our Recommended List has now reached 16.1 times next year's estimated earnings, up from 14.8 in June, while the average PEG ratio has pushed from 0.86 to 0.97.

This is not cause for alarm, however. A PEG of 1.00 is considered ideal. And paying 16.1 times earnings for stocks that are expected to grow earnings 19.2% a year is far better than shelling out 15 times earnings for the S&P 500 (SPX) universe, whose average earnings growth is an estimated 10%.

But “valuation creep” does flash a cautionary signal. It suggests that equity investors need to look harder than ever before leaping into rising stocks. Below, we look at several promising stocks.

Alliance Data Systems (ADS)

Steady growth is the hallmark of this Texas company whose products are designed to cement customer loyalty to its client companies—programs such as air miles and private label credit cards.

ADS has risen, almost without pause, from $25 to $240 since March 2009, and is posting better results in all sectors this year.

McKesson Corp. (MCK)

This San Francisco giant, with revenues well above $100 billion, distributes drugs, medical supplies, and healthcare technologies in North America, the UK, Europe, and Israel.

The stock has shot from 120 to 160 since August, but earnings are estimated to rise from $6.33 to $8.62 per share in its upcoming March 2015 fiscal year.

SanDisk Corp. (SNDK)

California-based SNDK, with its flash memory technology, is well-positioned for long-term growth in the smart phone, tablet, and enterprise software markets.

Though trading near the top of its 52-week range, its forward P/E is 13 and its PEG is a modest 0.75. Revenues are $6 billion. Its market cap is over $15 billion.

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