3 stocks with undervalued PEG ratios

Shares of these companies -- an auto retailer, an investment firm and a personal care products company -- should produce exceptional returns.

By TheStockAdvisors Jul 2, 2013 8:51AM

Arrow Up (© Photodisc/SuperStock)By J. Royden Ward, Cabot Benjamin Graham Value Investor

The PEG ratio is calculated by dividing the price-to-earnings (P/E) ratio by the sum of the earnings growth rate and dividend yield. A ratio of less than 1.00 indicates that a stock is undervalued.

To find undervalued stocks, I calculated the PEG ratios for the 1,000 companies in my database. Only companies likely to exceed analysts' sales and earnings estimates are included. I believe these recommendations will produce exceptional returns during the next six to 12 months.

AutoNation (AN)

AutoNation is the leading auto retailer in the U.S. The company owns and operates 265 new vehicle franchise dealerships located in major metropolitan markets in 15 states.

The company is benefiting from robust new vehicle sales spurred by improved employment, low interest rates, aging vehicles that need replacement, consumer interest in in-vehicle technology, and new car and truck models. AutoNation carries 32 car and truck brands.

In addition to its wide range of new vehicles, AutoNation offers used vehicles, auto parts and automotive services, plus automotive finance and insurance products. Dealerships also provide maintenance, repair, paint and collision repair services.

With a current P/E of 16.2 and a PEG ratio of 0.90, the stock price is quite reasonable. AN is medium risk and pays no dividend. Share price volatility is slightly above average, and the balance sheet is solid.

Fortress Investment Group (FIG)

Fortress Investment Group is a leading global alternative asset manager with $55.6 billion in assets under management as of March 31, 2013. It raises, invests and manages private equity funds and hedge funds.

The company intends to grow its existing businesses, while continuing to create innovative products to meet the increasing demand by sophisticated investors for superior risk-adjusted investment returns.

Fortress' assets under management received a big boost from stock market returns and from substantial additions to its private equity funds. Fund investments appreciated 30% from a year ago, which helped fuel 30% growth in capital inflows.

At 11.0 times current earnings per share and with a low PEG ratio of 0.65, FIG is undervalued. The dividend yield is 3.4%, which is attractive. The stock is high risk, though, because of wide swings in its share price.

Nu Skin Enterprises (NUS)

Nu Skin develops and distributes personal care products and nutritional supplements under the Nu Skin and Pharmanex brand names. Based in Provo Utah, Nu Skin derives a whopping 86% of sales from outside North and South America. Europe contributes less than 10% of sales.

Weak sales in Europe are being offset by strong sales throughout Nu Skin's other markets, including Korea and China. A strong turnaround in Japan is gaining momentum, too. New anti-aging products are selling well, and additional offerings will be launched during the next several quarters.

Sales rose 25% and earnings per share climbed 28% during the 12 months ended March 31, 2013, thanks largely to new product introductions. Nu Skin's new anti-aging products, and its soon to be introduced weight management system could push sales and earnings even higher.

At 16.5 times latest earnings per share and with a PEG ratio of 0.98, shares are attractive. The dividend yield of 2.0% and Low Risk rating create an excellent investment opportunity.

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