Friday, February 25, 2005

Searching for Value and Growth Across Industries

In my investing, I look for both good value and attractive growth prospects. I want to be able to acquire shares of high growth companies very cheaply. My investing style has a lot in common with what is called Growth At a Reasonable Price (GARP). A useful metric that captures the essence of GARP is the PEG ratio, which measures the cheapness or richness of a company's share price by taking a) its price-earnings ratio, and dividing by b) its consensus earnings growth estimate. A low PEG indicates that a company's shares are trading cheaply relative to the company's estimated growth potential. Attractive buying opportunities sometimes arise when PEG drops below 0.5.

Industry data available at finance.yahoo.com provide a ranking by PEG. Below I list the industries currently trading at the lowest and highest PEG ratios:

http://biz.yahoo.com/ic/l/peg.html

Industry: PEG

Lowest PEG:
Iron and Steel: 0.68
Insurance (Property & Casualty): 0.90
Construction (Supplies & Fixtures): 0.90
Mobile Homes & RVs: 0.96
Airlines: 0.98

Highest PEG:
Fish/Livestock: 4.71
Gold & Silver: 3.51
Electric Utilities: 3.50
Natural Gas Utilities: 3.36
Water Utilities: 3.29

The iron and steel industry stands out from the others as having a low PEG of 0.68. The largest companies in this industry by market capitalization are:

Company (Ticker): Market Cap., PE, 5-yr. Est. Earnings Growth, PEG
Mittal Steel (MT): $27.4 bil., 5.6, N/A, N/A
Posco (PKX): $19.5 bil., 5.2, 13%, 0.42
Nucor (NUE): $10.1 bil., 16.4, N/A, N/A
Companhia Sider (SID): $7.4 bil., 7.5, 15%, 0.60
Kubota (KUB): $7.2 bil., 12.9, N/A, N/A
U.S. Steel (X): $7.2 bil., 10.9, 6%, 1.25

I have been casually surveying this industry for the past few months. Recently shares of iron and steel companies have risen dramatically but they could still be undervalued if demand for steel remains strong. I plan to examine these companies more closely in a subsequent post.

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I would like to comment about search for growth and value. I have always believed in sticking with value over growth.

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