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By Michael Kaye, CFA Earnings growth was strong in 2004, with companies in the S&P 500-stock index posting an average increase of 21%. But suppose an investor could find some names that did even better over the past five years -- and yet were still trading well below a key valuation measure for the "500"?
That was the thinking behind this week's screen. We started with the valuation part, using a measure known as price-to-earnings growth ratio, or PEG (see BW Online, 1/28/05, "The PEG to Hang Your Picks On"). To recap, PEG represents a company's p-e divided by its expected five-year growth rate. PEG takes p-e a step further by relating the current valuation to a stock's prospects for future long-term growth.
SOLID MARKET CAPS. The lower the PEG, the less you're paying for future earnings growth. In this case, we looked for stocks with a PEG ratio under 0.75 -- far below the S&P 500's average (based on projected earnings) of 1.70.
Now for the growth part. We next sifted for those companies that had posted historical earnings per share and sales growth above 30% annually for the past five years. And as a final filter, each stock had to have a
market cap above $1 billion.
Here are the eight stocks that made the final cut:
Growth on the Cheap
Arch Capital Group
Kaye is an analyst for Standard & Poor's Portfolio Advisors