The PEG ratio, or Price/Earnings to Growth ratio, is a valuable tool for investors looking to identify potentially attractive stocks. It is calculated by dividing a company’s price/earnings (P/E) ratio by its earnings growth rate, which provides insight into whether a stock may be undervalued or overvalued based on its growth prospects. Generally, a PEG ratio below 1.0 is considered favorable, as it suggests a stock is undervalued relative to its growth rate. Currently, only about 10% of U.S. stocks meet this criterion, making the search for appealing investment opportunities within this framework more selective.
Among the companies that stand out as noteworthy investments based on their PEG ratios is Applied Materials Inc. (AMAT), a leader in semiconductor manufacturing equipment. With a PEG ratio of 0.90, the stock is priced at roughly 19 times its earnings and boasts a projected five-year earnings growth rate of about 21%. However, concerns arise regarding the potential impacts of ongoing U.S.-China trade tensions on its revenue, especially considering that a significant portion of its sales come from China. Despite these risks, the potential for growth remains enticing, making it a stock worth considering.
Another promising candidate is Regeneron Pharmaceuticals Inc. (REGN), which focuses on therapeutics for serious medical conditions such as eye diseases and cancer. Regeneron has an impressive after-tax profit margin of 33% and a PEG ratio of 0.98. The stock is currently trading around $757, with analysts projecting it could reach an average target of $1,093. Unlike many tech-centric companies, Regeneron may be less adversely affected by trade disputes due to its diversified product portfolio, as evidenced by the majority of analysts rating it a “buy.”
NVR Inc. (NVR), a homebuilder, has demonstrated remarkable performance in the past, with a 147% increase in stock value over the last five years. The company benefits from a unique position, with approximately 22% of its revenue stemming from the resilient Washington D.C. housing market, supported by consistent federal growth regardless of political administration. Additionally, NVR maintains a solid financial footing, characterized by a low debt ratio (only 24% of net worth) and ample cash reserves. With a PEG ratio of 0.82, it provides a compelling investment opportunity.
Despite facing increased competition since the COVID-19 pandemic, Zoom Video Communications Inc. (ZM) remains a relevant player in the communication technology space. With a substantial fiscal year revenue of $4.5 billion, the stock’s PEG ratio stands at an attractive 0.43. While skepticism surrounds the company’s future growth, there is potential for upside surprises. Currently priced around $81, analysts project a slight decline, yet investor interest remains due to Zoom’s capacity to adapt in a dynamic market.
HP Inc. (HPQ) offers an intriguing blend of traditional business stability and growth potential in the age of artificial intelligence. With a PEG ratio of 0.89, the company has managed to maintain a 14.5% earnings growth over the past five years, with stock trading at a P/E ratio of 12.9. HP also appeals to income-oriented investors through its robust 3% dividend yield, complemented by a history of substantial dividend increases. While the tech landscape evolves, HP’s consistent performance and attractive valuation warrant consideration by those looking for sound investment choices.
In conclusion, employing the PEG ratio as a stock selection tool can be a poignant strategy for investors aiming to find undervalued stocks with promising growth. Companies like Applied Materials, Regeneron, NVR, Zoom, and HP not only showcase favorable PEG ratios beneath 1.0, but also provide diverse avenues of growth across sectors, from technology to pharmaceuticals to consumer products. By carefully considering the risks and potential rewards, investors can leverage the PEG ratio to construct a well-rounded investment portfolio.