These 5 Stocks Have Magical PEGs - Investment Ideas

What if you could find a stock that had both value and growth? That would be a stock that had great potential. Some investors would consider it the magical combination.

But what does that mean, exactly?

Value investors have long looked to the price-to-earnings ratio as a means to finding value stocks. We all know that the lower a P/E ratio, the cheaper the stock.

However, Benjamin Graham, long considered to be the "father" of value investing, found that a low price-to-earnings ratio wasn't enough to unearth the true undervalued companies.

Using PEG to Find Top Stocks

To find these stocks, Graham combined the low price-to-earnings ratios with the power of growth by using the PEG ratio. The PEG ratio is calculated by taking the price-to-earnings (P/E) ratio and dividing it by the growth rate.

Normally, a stock with a PEG ratio under 1.0 is considered a magical combination: a stock with both value and the sometimes illusive growth.

With stocks surging over the past few months, and many stocks trading at expensive levels, it's gotten harder to find stocks with PEGs under 1.0. But they're certainly out there.

When a low PEG ratio is combined with the powerful Zacks Rank, it makes the magical combination of growth and value even more explosive.

5 Stocks With the Magical PEGs

1. Lithia Motors
2. Great Lakes Dredge & Dock
3. Deckers Outdoor
4. Barrick Gold
5. Arrow Electronics

Lithia Motors (LAD), the 9th largest auto retailer in the country, is trading with a forward P/E of just 15.6.

The Zacks #1 Rank (strong buy) is expected to grow earnings 70% in 2010 and 35% in 2011 as car sales have taken off. With a low P/E and high growth rates, its PEG is just 0.7.

Great Lakes Dredge & Dock (GLDD) is the largest dredging company in the United States but it also does work internationally and will be entering the Brazilian market next year. The company expects a record 2010 and is optimistic about growth in 2011 as well.

Analysts expect 2010 earnings growth of 80% and then for it to cool a bit in 2011 to 2%. Shares are trading at just 13x forward estimates and it has a PEG ratio of 0.5.

The Zacks #2 Rank (buy) also pays a dividend, currently yielding 0.9%.

Deckers Outdoor Corporation (DECK) makes the famous UGG boots and shoes. The footwear manufacturers have been hot. Deckers has surprised on estimates 4 quarters in a row.

Despite shares trading near 52-week highs, it is decently valued with a forward P/E of 16.7. With Deckers, its about the growth. Earnings are expected to grow at the rate of 24% over the next 5 years.

This Zacks #2 Rank (buy) has a PEG ratio of just 0.7.

Barrick Gold Corporation (ABX) is a surprise on this list. You'd think with gold at nearly record highs, that the gold mining stocks would be too hot to handle. But this worldwide gold miner is trading at just 16.2x forward estimates.

Analysts expect earnings growth in 2010 for 68% and another 15% in 2011. This gives this Zacks #2 Rank (buy) a PEG ratio of just 0.6.

Arrow Electronics (ARW) distributes electronic components and computing solutions worldwide. Arrow is dirt cheap, with a forward P/E of 7.4.

With earnings expected to surge by 146% in 2010, Arrow sports a PEG ratio of just 0.5. Arrow is a Zacks #1 Rank (strong buy) stock.

Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor in charge of the market-beating Zacks Value Trader service. You can follow her at twitter.com/traceyryniec.

 
BARRICK GOLD CP (ABX): Free Stock Analysis Report
 
ARROW ELECTRONI (ARW): Free Stock Analysis Report
 
DECKERS OUTDOOR (DECK): Free Stock Analysis Report
 
GREAT LAKES DRG (GLDD): Free Stock Analysis Report
 
LITHIA MOTORS (LAD): Free Stock Analysis Report
 
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