The PEG Ratio

Stock Valuation The PEG Ratio, short for price-to-earnings to growth ratio is a quick short hand of figuring out which stocks are possibly undervalued. The current conditions make for very elevated levels of market valuation of most equities except for a couple of sectors (commodities and energy). In searching for undervalued stocks, looking at the PEG ratio may provide you with a clue.

The PEG Ratio

A stock’s PEG ratio is simply the Price-to-Earnings ratio divided by the (expected) earnings growth rate. Note that technically, PEG ratio can indicate “forward PEG” or “trailing PEG”. Since we are only concerned about the future earnings for new investment dollars, it is a good idea to look at the forward PEG ratio in evaluating stocks. The lower the PEG ratio, the more undervalued a stock is. A rule of thumb used in the industry to evaluate stocks is looking for a number less than 1 – indicating that a stock is possibly undervalued. The PEG ratio provides a better picture than simply looking at the P/E of a stock. For e.g., you may choose to use a screener and exclude high P/E stocks, say anything over 20. This may not be the best course of action, as the high P/E might be justified if the company is expected to grow its earnings aggressively over the next few years.

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Recent Buy

Scotiabank

I re-initiated my position in Bank of Nova Scotia (BNS.TO). After cancelling my DRIP plan with BNS earlier this month, I moved my funds over to a tax-sheltered account and bought the shares. Going forward, I will not be paying any dividend withholding taxes or capital gain taxes on my BNS holding. The stock is still approx 15% undervalued at current levels.

Read my full dividend stock analysis here.

Chatter Around the World – 71

Chatter Around the World is a curated weekly update of articles related to economics, investing, dividends and personal finance. In these weekly updates, I also capture my blog updates and news related to my portfolio holdings.

Keystone XL

More likely to vote for a candidate who supports approving construction of the Keystone XL pipeline

New Blog Posts

Let’s dive into the links that caught my attention this week.

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Recent Buy

Magna International One of my favorite series of posts is when I add more capital to work and introduce a new stock to my portfolio. Here is my recent buy: I initiated a position in Magna International Inc (MGA) (MG.TO). Magna is a globally diversified automotive supplier headquartered in Aurora, Ontario, Canada.  In 2012 it was the largest automobile parts manufacturer in North America by sales of original equipment parts. Its operating groups include Magna Steyr, Magna Powertrain, Magna Exteriors, Magna Interiors, Magna Seating, Magna Closures, Magna Mirrors, Magna Electronics and Cosma International. Customers include General Motors (GM), Ford Motor Company (F), Chrysler LLC, Tesla (TSLA), BMW, Mercedes-Benz, Audi, Volkswagen, Land Rover, Toyota, and Honda to name a few (the customer list is too long from different divisions to include all names).

The company was founded by the Austrian-Canadian businessman and politician Frank Stronach. As of last year, he was ranked 19th wealthiest Canadian with a net worth of CAD $3.12B. Stronach founded the company in a Toronto garage in 1957, was chairman and CEO for decades and began the transition process to hand over the reigns in 2010 after a controversial $860M buyout of the multiple voting shares with which he controlled the company. In 2013, Magna paid him $52M (2.25% of Magna’s pre-tax profit) for consulting work and has indicated that 2014 will be the last year they will have him on the payroll. The company is now headed by Donald Walker, who has been in the industry for 34 years and with Magna  for 27 years.

Because all numbers reported by Magna Internatonal are in US$, this article unless otherwise specified uses US$. However, for my investment, I bought the Canadian listed stock (MG.TO) to avoid currency conversion hits.

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Recent Sell

Rogers Communications Inc

Although not common, there are times when dividends growth investors have to sell and exit a position. This post details my Recent Sell – Rogers Communications Inc (RCI.B.TO) (RCI). Rogers is a diversified communications and media company with operations across Canada. It is Canada’s largest provider of wireless voice and data communication services and also one of the leading providers of cable television, high-speed internet and telephony services. The company was founded in 1920 and headquartered in Toronto, Canada.

Reason for Buying

  • initiated the position in Rogers in Feb 2014. The company had just released its quarterly earnings, which were terrible and the market punished it with a drop of 5% in share price. I initiated a position as it was a well known company and I lacked much exposure to the telecom sector. I only owned BCE at the time.
  • The company has been paying dividends since 2000 and has a five year dividend growth rate of 11.7%.
  • The company had been investing in the media business to grow and looking for more avenues with better profitability.

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