Jim O'Shaughnessy, CEO of O'Shaughnessy Asset Management, is probably best known for his 1996 investment classic, "What Works On Wall Street". In it, he analyzes over 50 years of market data concluding that stocks with low price-to-sales ratios produce the best long-term returns, better than both price-to-book and price-to-earnings, the two more common ratios of the mid-1990s. O'Shaughnessy's work is quantitative in nature, preferring to let the numbers do the talking. I myself prefer to let them guide me to a point where I can make a qualitative choice, but nonetheless, when price-to-sales is combined with the PEG ratio, it is an awfully persuasive duo. Today, I'll look at four stocks that provide both value (P/S) and growth (PEG) at the same time. (Learn more about how the PEG ratio can help determine a stocks potential in PEG Ratio Nails DOwn Value Stocks.)
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|Scotts Miracle-Gro (NYSE:SMG)||0.94||1.63|
Micro Cap - Hawkins Inc.
Hawkins is a chemical distributor serving the Midwest from its base in St. Paul, Minnesota. Founded in 1938, today it distributes over a thousand products to customers throughout the middle-part of the country. Hawkins' fiscal 2009 was an oddity in that it produced unusually large operating profits, much higher than in previous years. In the three fiscal years between 2006 and 2008, operating income went from $7.3 million to $8.5 million. In 2009, it ballooned to $23.4 million. The main reasons contributing to this aberration include rising commodity prices, higher margins and captured market share from other competitors unable to fill certain orders.
In the company's first-quarter press release - revenues up 17.6% to $73.6 million and earnings per share 22.9% to $0.59 - CEO John Hawkins said: "Despite our positive results this past quarter, we still expect our fiscal 2010 business and gross profit realized to return to levels more in line with our historical results prior to fiscal 2009." Translation: operating margins in 2010 will be closer to 6-7% than 2009's 13%. Analysts estimate $2.50 EPS in 2010. Given the previous statement, I'd say they're far too high. I'd cut those by a third at least. Nonetheless, it's still a great story and the fact employees own 15.8% of the company and are its largest shareholder, gives me great confidence this is a long-term hold.
Small Cap - Carter's Inc.
Carter's owns the OshKosh B'Gosh brand. Though Carter's stock has broken out, rising 32% since last November, I believe its best is yet to come. Second-quarter results were excellent with sales up across the board in both wholesale and retail. Most importantly, adjusted operating income jumped 68% to $24.5 million from $14.6 million and management is predicting an even better second half of the year. I see no reason why the company can't test its all-time high, around $35, that it hit in 2006. We won't see that in 2009, but probably in 2010.
Mid Cap - Scotts Miracle-Gro Co.
Scotts' stock is up 47% year-to-date for good reason. Third quarter sales were up 9% company-wide and 16% in its global consumer segment. Its adjusted gross margin in Q3 was 210 basis points higher year-over-year and management re-affirmed its previous guidance for full-year adjusted EPS of $2.35 to $2.45. It seems the recession has sent all of us into the garden for some spiritual relaxation. Two key points I gleaned two things from the Q3 press release. One is that free cash flow will be at least $180 million, which can go towards paying down almost $1 billion in long-term debt. The other was consumer purchases are higher YTD in every state and 45 have produced double-digit increases. It seems some companies are coping with the recession after all.
Large Cap - Wal-Mart
Though I have some mixed feelings about Wal-Mart, I still believe it is an incredible story and anyone who's interested in retail should read Sam Walton's "Made In America". While I don't like some of the places where they've plunked down stores and I wish Sam's book meant the company bought and manufactured its products in America, I do have to give it kudos for handling a gargantuan task with relative ease, and in the process generating $22.8 billion in operating profits in fiscal 2009. The company has all this dough yet its stock's down 4% over the last five years and 10.8% YTD. At some point, you'd think it would move up. For that reason, I say take the reasonable dividend and wait patiently; it'll be worth it. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks.)
With the exception of Hawkins, these are companies I'm more comfortable owning. I understand consumer brands and the part they play in our world. I think all four should do just fine in the coming years.
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