Tech Trio and PEG Values

10/09/2014 7:00 am EST

Focus: STOCKS

Stephen Quickel

Editor, US Investment Report

PEGs are crucial in analyzing growth stocks, because they relate traditional P/E ratios to anticipated earnings growth, asserts Stephen Quickel, editor of US Investment Report.

The PEG ratio formula is to divide today’s forward P/E by the numerical five-year estimated earnings growth.

A 1.00 (one-to-one) PEG ratio is what advocates consider an ‘ideal’ valuation. A PEG anywhere below 1.15 is, on that basis, a stock worth considering for any growth portfolio, conservative or aggressive.

Here's a look at some new ideas in the tech sector.

Cognizant Technology Solutions (CTSH)

No stranger to our readers, we’ve favored this very large India-based technology outsourcer repeatedly for ten years.

Now bouncing back from a sudden plunge in August, triggered by analyst earnings downgrades, CTSH is rising but is still 15% below its 2014 high—trading at an 0.98 PEG—with 17% a year earnings growth projected and Buy ratings from 21 of 23 analysts.

Gamestop (GME)

A Grapevine, TX company that’s become a successful a multi-channel video game retailer, Gamestop sells video game hardware and software and related accessories through 6,700 company-operated stores in the US, Canada, Australia, and Europe.

Revenues top $10 billion. At a price of 44, with a P/E of 9.8 and PEG of 0.54, GME should reach $55 on 18.2% earnings growth abetted by a 29% spurt in the 12 months just ahead.

Google (GOOGL)

We’ve avoided this quintessential Internet stock ever since we were stopped out during last winter’s plunge from $615 to $515.

Now back to $600, and grown to $50 billion in revenues, Google is expected to grow earnings 18.3%.

The army of 47 analysts covering it—most calling it a Strong Buy or Buy—have been steadily raising their growth estimates. For this top quality stock, the 1.24 PEG ratio is not a deterrent.

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