Looking for More Apples: Check Growth Against Price
We're screening for tech leaders today. However, first a quick comment on the obvious -- Apple's multi-product announcement today at 1pm ET: Apple is trying desperately to prove it can still grow, and it needs to. The 64 analysts tracked by Bloomberg forecast earnings will decline 11 percent this year. Even if the company successfully introduces/markets/executes a low-priced iPhone for the Chinese market, the additional 40M unit sales will only add 10 percent to earnings next year, according to ISI's Brian Marshall. This boost would merely return earnings to last year's level.
So, I'm going in search of growth, looking for new Apples. We started with the 189 technology companies in the S&P 1500, then narrowed the field to 27 based on earnings growth for 2013/4 and "reasonable" pricing.
What defines "reasonable"? A PEG ratio of less than one.
Investing guru Peter Lynch popularized the PEG ratio in the 1980s (and turned Fidelity's Magellan Fund into a household name) by investing in growing businesses at relatively cheap valuations. He reasoned a stock was cheap when its price-to-earnings ratio was less than its growth rate, meaning a PEG of less than 1. Let's put some numbers to the concept.
In other words, you're attaching a valuation to a certain level of growth. While 16.8x earnings may appear more expensive the current market multiple of 15.3x, the valuation appears reasonable given 38 percent growth (especially considering S&P 500 earnings are forecast to rise a mere 8 percent, according to strategists tracked by Bloomberg). Again, think of PEG as the "price you're paying for the growth you're getting." We provided six additional names on-air:
Our group of 27 stocks is up 37 percent this year, more than double the S&P 500. Use this group as a starting point -- and read Lynch's "Beating the Street." Here's the complete list of 27 companies with PEGs of less than one:
ACI Worldwide Inc. (ACIW), Advanced Energy Industries Inc. (AEIS), AOL Inc. (AOL), Arris Group Inc. (ARRS), Blackbaud Inc. (BLKB), Blucora Inc. (BCOR), CalAmp Corp. (CAMP), Ciber Inc. (CBR), Diodes Inc. (DIOD), Exar Corp. (EXAR), Igate Corp. (IGTE), Ingram Micro Inc. (IM), Juniper Networks Inc. (JNPR), Mentor Graphics Corp. (MENT), Nic Inc. (EGOV), Oplink Communications Inc. (OPLK), PC-Tel Inc. (PCTI), Perficient Inc. (PRFT), Power Integrations Inc. (POWI), Qualcomm Inc. (QCOM), SanDisk Corp. (SNDK), Skyworks Solutions Inc. (SWKS), Synaptics Inc. (SYNA), Tangoe Inc. (TNGO), VeriSign Inc. (VRSN), Virtusa Corp. (VRTU).