The price-to-earnings, or P/E ratio, is the best-known valuation metric in the investment community. It intuitively tells how a stock is valued in the market relative to past or future profits.
Yet despite its usefulness and broad appeal, it doesn’t always tell the whole story. That’s where the PEG ratio comes in.
A close cousin to the P/E ratio, a PEG simply divides a company’s valuation by its expected earnings growth rate, typically over the next three to five years. The PEG ratio tells investors how much they’re paying for anticipated growth.
It effectively levels the playing field among stocks that have high and low P/E ratios. A stock that seemingly has an outlandish valuation from a P/E perspective may actually be inexpensive based on the growth ahead—and vice versa.
The market downturn has resulted in plenty of depressed P/E ratios. But how do we know which companies are the best bargains?
With inflation expected to result in lower profitability for much of corporate America in 2022, looking ahead to what’s coming in 2023 and beyond is a good place to start. The ultra-low PEG ratios of these three stocks suggest their share prices will have some serious catching up to do as future earnings growth kicks in.
Is Ford a Good Buy and Hold Stock?
Ford Motor Company’s (NYSE: F) valuation is attractive from a P/E standpoint at 4x trailing earnings. It gets even more attractive when we look down the road to the growth that the automaker is expected to produce.
Based on analysts’ long-term EPS growth projection of 74%, Ford has a miniscule PEG ratio of 0.05. This places it in the lowest quintile in the auto industry, which has an average PEG ratio of 1.70.
As semiconductor shortage, supply chain disruption, and cost inflation pressures ease, Ford is expected to see a nice jump in profitability in 2023. Things should get better from there as the company ramps up its electric vehicle program.
The Mustang Mach-E, the third best-selling EV in the U.S., along with the F-150 Lightning pickup are already leading the charge. Much of the future growth is expected to come from the Ford E-Transit platform for delivery, construction, and other industrial applications.
What is Skechers’ PEG Ratio?
Skechers U.S.A., Inc. (NYSE: SKX) has the highest long-term earnings growth projection in the apparel industry. This gives it one of the lowest PEG ratios (0.10) within not only its peer group but the entire U.S. mid-cap space.
The fast-growing sneaker business has been slowed of late by supply chain hurdles and lockdowns in China. Along with general market weakness, the share price has come down 35% from last year’s record peak. It is now a great fit for long-term growth investors.
As the near-term headwinds subside, Skechers is expected to derive above-industry growth from doing what it does best—launching innovative footwear and accessories that appeal to a broad global audience. New brick-and-mortar stores will be opened and digital capabilities improved to enhance an already strong brand.
Skechers biggest growth opportunities are overseas where new international distribution agreements stand to spread awareness of the company’s popular comfort technology. The growth should really kick into high gear as it further penetrates China, India, and other emerging markets.
What is the Best Hotel Stock?
Marriott International, Inc. (NASDAQ: MAR) has had $50 slashed from its share price since nearly reaching $200 in April 2022. In turn, the P/E ratio has come down to 32x. On the surface it seems expensive, but is actually far from it.
Not only has the hotel operator returned to profitability when most chains are still operating in the red, but it has a bottom decile PEG ratio of 0.24. This stems from a 135% long-term EPS growth forecast that leads all industry peers.
Why is Marriott expected to outperform over the next few years?
First, the company’s portfolio of owned and franchised brands largely caters to the corporate travel market. As more business meetings are held in person and conferences resume, booking trends are poised to rebound sharply across Marriott’s global footprint. Japan in particular is expected to be a hotbed of business activity. This has Marriott scrambling to open seven new Fairfield hotels there this year.
The property buildout in Japan is consistent with what Marriott is doing in other popular business and leisure markets. To capitalize on pent-up travel demand everywhere, Marriott is beefing up the higher end luxury and lifestyle part of its portfolio. A development pipeline of nearly 3,000 hotels is just the start of a multiyear expansion strategy that emphasizes growth outside the U.S. Based on the growth ahead, Marriott can be pegged as an undervalued long-term winner.