Note From Louis Basenese: I’m currently in New York City, presenting at The Oxford Club’s Total Financial Solutions Seminar. So I’ve enlisted fellow investment analyst, Frank Curzio of The Growth Stock Wire, to stand in for me today.
Frank is the editor of Penny Stock Specialist and in the column below, he examines the market’s recent drop and highlights five companies that have also dropped to attractive valuations.
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Over the past eight weeks, investors have had nowhere to hide…
Stocks across every sector are down. The S&P 500 has fallen more than 5%. The large-cap index has given up nearly all of its gains for 2011.
The big question on investors’ minds is: Will stocks rebound?
It’s a good question, considering the S&P 500 has rallied on every pullback from the March 2009 lows. For example, the it fell 6.5% in early 2010. Two months later, the index rebounded more than 11% to a 52-week high.
From April-August 2010, the S&P fell 11%, but stocks again rebounded sharply to a 52-week high.
That brings us to our recent pullback…
Why You Should Track the PEG Ratio
Right now, it’s difficult to tell if stocks will sell off further or bounce back. And there are fundamental arguments to make either way…
On the negative side, our deficits continue to grow, home prices are still falling, we added fewer jobs last month, and overall manufacturing has slowed.
On the positive end, stocks are trading at dirt-cheap valuations and corporate balance sheets are stronger than ever. Plus, if we see a further decline, the Fed could initiate another major stimulus plan.
With all the uncertainty, buying here could be a risky proposition. So what I’m doing is checking PEG ratios. The PEG is the price-to-earnings ratio (P/E) divided by the company’s earnings growth rate.
In weak markets, PEG ratios are especially significant. Understanding how much a company is expected to grow over the next one to three years will help you avoid “value traps” – companies that look cheap, but are likely to get even cheaper.
And right now, using the PEG, I see several market-leading companies trading at attractive levels.
Below is a table of five companies that are giants in their respective industries. They’re all down more than 10% over the past eight weeks. More importantly, they now have PEG ratios of less than 1.0. That means their growth rates are higher than their P/E ratios.
Take a look…
If you’re not using the PEG, you might not give these companies another look.
For example, engine maker Cummins has a P/E ratio of 15.9. That may seem a little expensive compared to the S&P 500, which is trading at 13 times earnings.
But Cummins is expected to grow its earnings by almost 20% next year. That gives the company a PEG ratio of less than 1.0 Based on its PEG, Cummins looks like a strong buy following the 17% pullback. And I’d say the same for any of these five global leaders.
Keep in mind, most of these companies are sensitive to global economic growth. But if you’re in the “glass half-full” market camp like me, these are attractive positions.
P.S. If you decide to buy here, the best approach is to scale into these stocks. That means buying small lots over a certain period of time. Buying a full position in any one company while the markets remain in a downturn could be dangerous. Nibbling away at these names is a much safer strategy.