Recently I did an analysis of top 12 stocks of 2020 for companies with fastest growing sales here: https://www.wininstocks.com/post/top-12-stocks-of-fastest-growing-companies-in-2020
This time, we will look at top 15 undervalued stocks based on PEG analysis.
VALUE INVESTING is an investment strategy made popular by Warren Buffet, the principle behind value investing is simple: buy stocks that are cheaper than they should be. Finding stocks that are under-priced takes a lot of research on the fundamentals of the underlying companies. And once you've found them, it often takes a long time for their price to rise. This buy and hold technique requires a patient investor but should the right call be made, handsome payoffs could be earned.
In this article I collected 15 undervalued stocks based on their current PE (price-to-earnings) and PEG (price-to-earnings-to-growth) ratios.
It is true that some stocks are undervalued for a reason: due to low gross or net profit margin, little predicted sales/profit growth, risks (competitor, due to country of operation, etc.) However, some stocks are undervalued for a reason that is of interest to us as these stocks may greatly appreciate in price once investors realize the balance between price and earnings growth for the company is off.
Such reasons are:
Industry is not sexy enough with little interest from investors.
Country of operation is not top of mind for big investors.
Past issues with company (declining growth, profits, bad estimates). With that most of investors stop following the company and remove it from their watch lists. Price declines to the level when the stock is under-priced. However, those companies sometimes make a come-back as they start to fix past issues and are making some progress.
While PE ratio is widely used by investors, it is not good enough to spot those come-backs as it looks at the current moment. PEG ratio, however, is the great ratio to spot the undervalued stocks for 1) their current earnings; 2) anticipated growth in earnings.
To calculate the PEG ratio, an investor or analyst needs to either look up or calculate the P/E ratio of the company in question. The P/E ratio is calculated as the price per share of the company divided by the earnings per share (EPS), or price per share / EPS.
Once the P/E is calculated, find the expected growth rate for the stock in question, using analyst estimates available on financial websites that follow the stock. Plug the figures into the equation, and solve for the PEG ratio number.
According to well-known investor Peter Lynch, a company's P/E and expected growth should be equal, which denotes a fairly valued company and supports a PEG ratio of 1.0. When a company's PEG exceeds 1.0, it's considered overvalued while a stock with a PEG of less than 1.0 is considered undervalued.
Below you will see Earnings Estimates for each company for the next 4 years. Using current price we can calculate both the current PE, future PE, and PEG ratios. Sometimes a low PE does not mean the company is cheap. However, when low PE is combined with decent expected EPS growth this hints to stock being undervalued.
1. Callon Petroleum Company (CPE)
Current PE: 3.84
Expected EPS growth in next 4 years: 24%
Analyst Recommendation: 4.4 (Overweight)
Callon Petroleum Co. engages in the exploration, development, acquisition, and production of oil and natural gas properties. It focuses on unconventional oil and natural gas reserves in the Permian Basin. The company was founded by Sim C. Callon and John S. Callon in 1950 and is headquartered in Houston, TX.
CPE stock saw its high point of $18 in 2016. Since then the stock price declined to just $2.88. With that, its P/E ratio dropped to just 3.84. Moreover, the estimated EPS growth for the next few 4 years is expected at average 24%. This provides the PEG score of just 0.14.
The company saw strong increase in revenue and EPS from 2016 to 2018. In 2019 the Revenue was flat.
However, a few developments are making analysts think the EPS for the company is going to grow. As per the company analysis here: https://www.zacks.com/stock/research/CPE/company-reports
In April, 2019, Callon Petroleum agreed to divest certain non-core assets in the Midland Basin. The assets include Ranger operating area in the southern Midland Basin, which comprises net Wolfcamp acreage of about 9,850. It also includes more than 80 producing horizontal wells that have been drilled since 2012 and 70 net as well as delineated locations that surpass an internal rate of return of more than 25% at strip pricing. Notably, on Jul 15, 2019, Callon Petroleum struck an all-stock $3.2-billion deal to acquire Carrizo Oil & Gas. The combined company is expected to have around 200,000 net acres in the Permian Basin and Eagle Ford shale, once the deal closes during fourth-quarter 2019.
Also, in the first quarter of 2019, Callon Petroleum completed a strategic deal that augmented the net acreage of Callon Petroleum's Midland Basin leasehold position by about 167 acres. The deal has strengthened the company’s adjacent position in northwest Howard County through the addition of two incremental long-lateral drilling spacing units (DSUs) in exchange for low working interest properties in Midland County.
In third-quarter 2019, net production volumes averaged 37,837 Boe/d, reflecting an increase from the year-ago period’s 34,913 Boe/d.
The mean analyst recommendation for Callon Petroleum Co. (CPE) is 4.4 (Overweight) and target price is $6.42 which is a gap of 123% to current price.
2. Victory Capital Holdings, Inc. (VCTR)
Current PE: 8.42
Expected EPS growth in next 4 years: 35%
Analyst Recommendation: 4.5 (Overweight)
Victory Capital Holdings, Inc. engages in the provision of investment management products and services to institutional and intermediary clients. The company sells and distributes its products through centralized distribution model, broker-dealers, retirement platforms, and registered investment advisor networks. Its model features an operating platform that provides centralized distribution, marketing, and operations infrastructure to its franchises and solutions platform. The company was founded on February 13, 2013 and is headquartered in Brooklyn, OH.
Victory Capital Holdings, Inc. (VCTR) is trading from February 2018. Since then, the stock appreciated from $12 to $22. However, at the current price the stock is still quite under-priced. The current P/E is just 8.42, but the average estimated EPS growth for the next 4 year is 35%. With this, stock PEG ratio is 0.14.
The company was gaining in revenue and EPS well over the past 3 years. The price for the stock seem to have not yet pick up the pace of the growth of the company.
Analysts mean recommendation for the stock is 4.5 (Overweight). The average target price is $26.10 which gives a gap of +18% to current price.
3. NRG Energy, Inc. (NRG)
Current PE: 13.13
Expected EPS growth in next 4 years: 22%
Analyst Recommendation: 4.6 (Buy)
NRG Energy, Inc. engages in the production, sale, and distribution of energy and energy services. Its wholesale operations include plant operations, commercial operations, EPC, energy services and other critical related functions. It operates through the following segments: Generation, Retail, and Corporate. The Generation segment includes all power plant activities, domestic and international, as well as renewables. The Retail segment includes mass customers and business solutions, which includes C&I customers and other distributed and reliability products. The Corporate segment includes residential solar and electric vehicle services. The company was founded in 1989 and is headquartered in Princeton, NJ.
NRG stock appreciated 300% from $10 in 2016 to $40 just recently. The company recovered from the decline in sales seen in the past years and in 2018-2019 the company saw increasing growth in sales and EPS. Also, analysts predict the company will continue to grow EPS at average 22% in the next 4 years. With this, current P/E score of $13.13 is low giving PEG ratio of 0.17.
Analysts provide a mean recommendation of 4.6 (BUY) for NRG stock with a target price of $48.78 which is a 22% gap to the current price.
4. Air France-KLM SA (AFLYY)
Current PE: 24.48
Expected Average EPS growth in next 4 years: 40%
Analyst Recommendation: 3.6 (Overweight)
Air France-KLM SA provides passenger and cargo air transportation services. Its activities include cargo, aeronautics maintenance and other air transport related activities such as catering and charter services. The company operates its business through the following segments: Passenger & Cargo Network, Maintenance, Transavia, and Other. The Passenger & Cargo Network segment offers transportation services on the scheduled flights of the network airlines Air France, KLM, HOP and Joon. The Maintenance segment provides airframe & engine maintenance and component support services. The Transavia segment operates point-to-point flights on departure from the Netherlands and France. Air France-KLM was founded on April 23, 1947 and is headquartered in Paris, France.
We all know stocks of air transportation companies carry a lot of risk with frequent bankruptcies for the category. This risk is taken into the account by investors, usually providing lower PE and PEG scores for the industry. However, in the case of AFLYY, the company PEG score is very low.
Analysts predict company EPS is going to grow on average 40% in the next 4 years. The company was also slowly adding in revenues for the past 3 years which provided a good level of EPS growth.
Analysts give AFLYY a rating of 3.6 (Overweight) and a target price of $12.01 which is +17% gap vs. current price.
5. GNC Holdings, Inc. (GNC)
Current PE: 17.08
Expected Average EPS growth in next 4 years: 28%
Analyst Recommendation: 4.0 (Overweight)
GNC Holdings, Inc. engages in the global retail of health, wellness and performance products, including vitamins, minerals and herbal supplements products, sports nutrition products and diet products. It operates through the following segments: U.S. & Canada, International and Manufacturing or Wholesale. The U.S. and Canada segment generates revenues primarily from sales of products to customers. The International segment generates revenue primarily from its international franchisees through product sales, royalties and franchise fees and also includes its China operations and The Health Store. The Manufacturing or Wholesale segment comprises of its manufacturing operations in South Carolina and its wholesale partner relationships. The company was founded by David Shakarian in 1935 and is headquartered in Pittsburgh, PA.
GNC Holdings, Inc. (GNC) had a few years of declines in sales over the past few years, but was able to grow Net Profit due to cost-cutting. The 2 analysts think the company will resume EPS growth in the next 4 years providing the stock a PEG ratio of 0.23.
They provide the company a rating of 4 (Overweight) and a target price of $3.75 which is +69% gap to current price.
6. Canadian Solar Inc. (CSIQ)
Current PE: 8.48
Expected Average EPS growth in next 4 years: 21%
Analyst Recommendation: 4.2 (Overweight)
Canadian Solar, Inc. engages in the manufacture of solar photovoltaic modules and a provider of solar energy solutions. It operates through the Module and System Solutions (MSS), and Energy segments. The MSS segment involves in the design, development, manufacture, and sales of solar power products and solar system kits, and operation and maintenance services. The Energy segment comprises primarily of the development and sale of solar projects, operating solar power projects and the sale of electricity. The company was founded by Shawn Qu in October 2001 and is headquartered in Guelph, Canada.
Canadian Solar, Inc. (CSIQ) sales were growing in 2017 and 2018 resulting in strong EPS growth. In 2019, sales were a bit volatile from quarter to next. However, analysts predict good growth EPS growth in the next 4 years. With that, current P/E is low, providing for PEG score of 0.24
Analyst mean recommendation for CSIQ stock is 4.2 (Overweight). However, target price is just $24.60 which is just 5% above current price.
7. JinkoSolar Holding Company Limited (JKS)
Current PE: 18.89
Expected Average EPS growth in next 4 years: 37%
Analyst Recommendation: 3.5 (Hold)
JinkoSolar Holding Co., Ltd. engages in the design, development, production and marketing of photovoltaic products, and solar system integration services. It focuses on vertically integrated solar power products manufacturing business from silicon ingots, wafers, and cells to solar modules. The company was founded by Xiande Li, Kangping Chen, and Xianhua Li on August 3, 2007 and is headquartered in Shangrao, China.
JinkoSolar Holding Co. (JKS) was growing sales very quickly from 2014 to 2017. With that, it was also gaining in EPS. in 2018, however, revenue slightly declined. In 2019 revenues were going up and down. However, analysts think that eventually the trade war of the USA with China will eventually end (obviously, there is risk attached here). They expect the company will grow EPS by an average of 37% in the next 4 years. This provides the stock a PEG ratio of 0.25.
Analysts currently provide a HOLD rating for the company due to international risks.
8. Navient Corporation (NAVI)
Current PE: 5.65
Expected Average EPS growth in next 4 years: 16%
Analyst Recommendation: 3.7 (Overweight)
Navient Corp. engages in the provision of asset management and business processing solutions for education, healthcare, and government clients at the federal, state, and local levels. It operates through the following segments: Federal Family Education Loan Program (FFELP) Loans, Private Education Loans, Business Services, and Other. The FFELP Loans segment acquires FFELP loan portfolios which are insured or guaranteed by state or not-for-profit agencies. The Private Education Loans segment acquires, finances, and services private education and private education refinance loans through Earnest. The Business Services segment includes business processing services related to servicing, asset recovery, and other business processing activities. The Other segment consists of repurchase of debt, corporate liquidity portfolio, unallocated overhead, restructuring and other reorganization expenses, regulatory-related costs, and the deferred tax asset re-measurement loss. The company was founded on November 7, 2013 and is headquartered in Wilmington, DE.
Navient Corp. (NAVI) saw a bit of a decline in Revenue in 2019. However, it was able to grow EPS due to cost-cutting.
Analysts expect the company to grow EPS at an average 16% in the next 4 years, which provides for PEG ratio of 0.27.
Mean rating from analysts in 3.7 (Overweight) with target price of $17.40 which is 19% above current price.
9. DAQO New Energy Corp. (DQ)
Current PE: 34.39
Expected EPS growth in next 4 years: 108%
Analyst Recommendation: 4.8 (Buy)
Daqo New Energy Corp. is a holding company, which engages in the manufacture and sale of polysilicon products for the solar cell and module manufacturers. It operates through the Polysilicon and Wafer segment. The company was founded by Guang Fu Xu on November 22, 2007 and is headquartered in Chongqing, China.
Daqo New Energy Corp. (DQ) stock price grew from $36 to $72 in the past year. As the company saw a decline in Revenue in 2018, but was able to recover the growth in 2019 the analysts are giving it a rating of 4.8 (BUY).
Analysts expect company EPS to grow quickly in the next few years, which provides a low PEG score despite P/E is at 34.39.
10. United Airlines Holdings Inc (UAL)
Current PE: 6.57
Expected Average EPS growth in next 4 years: 12%
Analyst Recommendation: 4.4 (Overweight)
United Airlines Holdings, Inc. engages in the operation of its wholly-owned subsidiary United Airlines, Inc, which offers satellite based Wi-Fi, including on long-haul overseas routes. It operates through the following geographical segments: Domestic (U.S. and Canada); Pacific; Atlantic; and Latin America. It also transports people and cargo through its mainline and regional operations. The company was founded on December 30, 1968 and is headquartered in Chicago, IL.
Another airline company in our set with quite low P/E and PEG scores. The analysts give UAL stock a rating of 4.4 (Overweight) with a target price of $109.59 which is 38% above current price. UAL is expected to grow EPS at an average 12% per year in the next 4 years.
The stock recently dropped from $94 to $79 which was caused by earnings miss in the latest quarter. With that we may expect some rating revisions in the next couple months.
11. Berry Petroleum Corporation (BRY)
Current PE: 5.35
Analyst Recommendation: 3.7 (Overweight)
Berry Petroleum Corp. is an independent upstream energy company, which engages in the development and production of conventional oil reserves. The company was founded by C. J. Berry in 1909 and is headquartered in Dallas, TX.
Probably, the company with the weakest outlook in our set. The company grew sales well in the past 2 years, but in 2019 sales growth slowed down. However, PEG scores for BRY is very low. Analysts give the stock a rating of 3.7 (Overweight) with a target price of $12 which is 65% higher than the current stock price.
12. Foundation Building Materials, Inc. (FBM)
Current PE: 18.18
Analyst Recommendation: 4.1 (Overweight)
Foundation Building Materials, Inc. is a holding company, which engages in the distribution of wallboard, suspended ceilings systems, metal framing, and complementary products. The company serves as a critical link between supplier base and interior contractors who install building products for commercial and residential buildings for both new construction and repair and remodel markets. The company was founded by Ruben D. Mendoza, John Gorey, and Tom Fischbeck in 2011 and is headquartered in Santa Ana, CA.
Foundation Building Materials, Inc. (FBM) stock appreciated in the past year from under $10 to $20. However, it seems, based on expected EPS growth and current PEG ratio the stock still have some upside potential.
Analysts give FBM a rating of 4.1 (Overweight) and a target price of $23, which is 27% above current price.
13. Discovery, Inc. (DISCA)
Current PE: 8.73
Analyst Recommendation: 3.9 (Overweight)
Discovery, Inc. is a media company, which engages in the provision of content across distribution platforms and digital distribution arrangements. It operates through the following segments: U.S. Networks, International Networks, Education and Other, and Corporate and Inter-segment Eliminations. The U.S. Networks segment owns and operates national television networks such as Discovery Channel, Animal Planet, and Investigation Discovery and Science. The International Networks segment consists of international television networks and websites. The Education and Other segment offers curriculum-based product and service offerings. The Corporate and Inter-segment Eliminations segment represents unallocated corporate amounts. The company was founded by John S. Hendricks in September 1982 and is headquartered in Silver Spring, MD.
Discovery, Inc. (DISCA) stock saw great sales growth in the past few years. In 2019, sales growth was volatile from one quarter to the next.
However, analysts predict that EPS growth will accelerate for the company. With that, current PEG ratio is low.
Analysts mean recommendation is 3.9 (Overweight) with target price of $34.50 which is 14% above current price.
14. JetBlue Airways Corporation (JBLU)
Current PE: 11.14
Analyst Recommendation: 3.8 (Overweight)
JetBlue Airways Corp. provides air transportation services. It carries more than 30 million customers a year to 86 cities in the U.S., Caribbean, and Latin America with an average of 850 daily flights. The company offers flights and tickets to more than 82 destinations, with accommodations such as free TV, free snacks, and most legroom. JetBlue Airways was founded by David Gary Neeleman in August 1998 and is headquartered in Long Island City, NY.
JetBlue Airways Corp. (JBLU) EPS is expected to grow on average 16% in the next 4 years. It also saw good revenue growth in the past 3 years.
With that, analysts provide a mean recommendation of 3.8 (Overweight) and a target price of $23.13, which is 9% above the current price.
15. Lenovo Group Ltd. (LNVGY)
Current PE: 11.83
Analyst Recommendation: 3.9 (Overweight)
Lenovo Group Ltd. is an investment holding company, which engages in the developing, manufacturing, and marketing technology products and services. Its products include personal computers, workstations, servers, storage, smart televisions, and mobile products such as smartphones, tablets, and applications. The company was founded in 1984 and is headquartered in Hong Kong.
There are risks associated with Lenovo Group Ltd. (LNVGY) with the trade war between China and the USA. With that, growth in stock price we saw at the end of 2018 was halted, and the stock lost half of its value. However, analysts predict average EPS growth for the company of 25% for the next 4 years.
Analysts have a mean recommendation of 3.9 (Overweight) an an average target price of $16.78 which is 23% above the current price.
As noted at the beginning of the article some of the stocks are valued low for a reason due to risks associated with them. Finding the truly undervalued stock takes time and a lot of analysis of the current financial situation of the company, its projected growth, management goals. I hope that in this article I gave you some ideas for further analysis of the above companies to add a couple to your portfolio.