Stock Focus: Growth At A Fair Price
Thanks to the 13% drop in the Standard & Poor's 500 from a year ago, investors shopping for value need not hunt for obscure widget makers or take a chance on a badly deflated Internet stock. While many stocks sell for less than the S&P 500's estimated 2001 price-to-earnings ratio of 25, only a handful look cheap based on their growth potential.
The price-to-earnings-growth ratio (PEG) assesses a company's stock value relative to its estimated long-term earnings growth. It is calculated by taking the forward P/E (current price divided by the earnings-per-share forecast for the 2001 fiscal year) and dividing it by the stock's long-term annualized earnings growth forecast.
As a rule of thumb, a company is fairly valued when the PEG is 1, which is when the forward P/E equals estimated earnings growth. A stock is possibly undervalued when the PEG falls below 1.
Jones Apparel Group has a PEG of just 0.9 even though the company has posted a 33% average annual gain in per-share profits over the past five years. "The market continues to favor retail stores," says Margaret B. Whitfield, apparel analyst at Tucker Anthony Sutro Capital Markets. "But women's apparel in the department store channel has been the best performer year-to-date, and Jones has been the leader with its Jones New York brand and licensed Lauren line."
Whitfield expects profits at Jones to increase 20% this year and 20% per year over the next three to five years. Nevertheless, the stock sells for only 15 times estimated 2001 profits.
The companies in our table all have PEG ratios less than 1.0, market values of at least $1 billion and annual sales of more than $600 million. To be on the cautious side we tweaked the PEG calculation. Instead of using the consensus estimate for 2001 earnings, we used the forecast from the most pessimistic analyst.
Similarly, we used the median long-term growth estimate from all the analysts tracking each stock. The median, or middle number, can lessen the impact of estimates at either tail. |
