Invest in Stocks with the Magic Combination
What would be your dream stock?
For many, it is finding that hidden value stock that then goes on to soar as the company produces earnings beat after earnings beat.
For others, the only choice would be a growth stock, where the company grew its earnings by double digits year over year.
But what if you could have both value and growth in the same stock?
This is what I call the magic combination. Although it's rare to have a stock that combines both investing styles, they do exist.
Value + Growth = Magic Combination
Investors can find stocks with the magic combination using several methods.
1. Use the PEG ratio. The PEG is calculated taking the price-to-earnings ratio and dividing by earnings per share growth.
Most financial web sites, including Zacks.com, already have the PEG calculated for you so all you have to do it look for it when you put the ticker into the quote page.
2. Find stocks that trade with low P/Es and then look for stocks that trade with earnings per share growth in the double digits.
This is also easy to do on Zacks.com as both the P/E and estimated earnings growth can be found on the "Estimates" page.
3 Stocks With the Magic Combination
I chose to use method #2 to find my stocks this time. It didn't take me long, using a basic screen, to find these 3 stocks all of which have P/Es under 10 and expected double digit (or higher) earnings growth for 2011.
All of the stocks are in the natural resources/commodities sector which has seen explosive earnings revisions higher as commodities prices rise. Investors appear to be ignoring the earnings potential on these companies which is why they have low P/Es.
1. Western Refining
2. VALE S.A.
3. Cliffs Natural Resources
Western Refining (NYSE: WNR) is an independent refining company in Texas. It operates 2 refineries in El Paso and Gallup, New Mexico. This Zacks #2 Rank (buy) also operates terminals and retail service stations.
Forward P/E: 8.4
2011 earnings growth: 1870%
Western lost 11 cents in 2010 but the 2011 Zacks Consensus Estimate is calling for $1.95 per share, hence the huge growth rate.
The share price has really jumped, but the value is still there.
VALE S.A. (NYSE: VALE) is one of the largest mining companies in the world. This Brazilian iron ore producer also mines coal and the precious metals.
Forward P/E: 6.5
2011 earnings growth: 56%
VALE has benefited from rising iron ore prices. The 2011 Zacks Consensus Estimate expects VALE to earn $4.77 which is a huge gain from the $1.00 it made in 2009, at the height of the global recession. VALE is also a Zacks #1 Rank (strong buy).
Cliffs Natural Resources Inc. (NYSE: CLF) also mines iron ore and coal, but mainly in the U.S. and Australia. This Zacks #1 Rank (strong buy) is as cheap as VALE.
Forward P/E: 6.5
2011 earnings growth: 73%
Iron ore prices are expected to get a temporary boost due to Japanese reconstruction after the earthquake and tsunami.
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