Looking for growth shares at times like these? Oh yes.
Convinced as I am that we are heading into better times for stock markets, and that the time will soon be ripe for growth shares to emerge once more from the gloom, I've turned back to one of the very first investment writers I ever followed -- Jim Slater, and his famous PEG ratio.
The PEG divides a company's prospective price to earnings (P/E) ratio by its forecast earnings per share (eps) growth, looking for low values that suggest the price has some rising to do. Jim Slater looks for a value of 0.7 or less.
Filtering for such low PEG shares, I've uncovered a few promising candidates. Dividends don't usually figure in growth share searches, but I've included them in the following table because, well, we'll see...
| Company | P/E | eps growth | PEG | Dividend |
|---|
| Chemring Group (LSE: CHG) | 7.5 | 24% | 0.3 | 3.7% |
| Volex (LSE: VLX) | 8.9 | 22% | 0.4 | 0.2% |
| Aberdeen Asset Management (LSE: ADN) | 13.7 | 26% | 0.5 | 4.0% |
| Wm Morrison (LSE: MRW) | 10.1 | 15% | 0.7 | 4.1% |
| Hilton Food Group (LSE: HFG) | 9.5 | 14% | 0.7 | 4.7% |
(Morrison and Volex are near the end of their year, so figures are from 2013 forecasts, others are 2012)
What do these companies have in common? Not a lot really, but I think it shows how useful the PEG ratio can be even in times when it uncovers more than just traditional growth companies.
Recovery indicator
The aerospace and defence engineer Chemring is a good example. In a sector that is out of favour, largely due to government cutbacks, it has seen its share price fall all the way from over £7 to around £4.30, even though earnings are still growing and forecasts are strong for this year and next.
The fallen share price brings us a PEG of only 0.3 for the year ending October 2012. And the reason I included dividends in the table -- it's offering a decent 3.7% yield that's thrice covered by forecast earnings.
Is Chemring oversold due to bearish overreaction? It might well be.
Food sellers?
And yes, we have Wm Morrison coming through a growth filter! But that's not as surprising as it might seem, as Morrison has been growing its profits quite nicely over the past few years, and with 15% earnings growth forecast for January 2013, it looks like it's profiting nicely from the stumble that Tesco (LSE: TSCO) seems to have taken of late.
With the price having moved just about nowhere over the past 12 months, it could be a good time to buy now at 290p.
We also have Hilton Food Group, which is in the perhaps unglamorous business of making wholesale meat packaging. Although it has been up and down a bit, the share price has doubled since early 2009 to the 265p level today, while profits and dividends have been steadily growing. At £185m, it's a small cap company, with modest year-end debt in 2011, and another strong year forecast.
Real growth
Talking about unglamorous, Volex makes cables -- power cords, fibre optic cables, and stuff like that. It might not sound exciting, but it's a very profitable business. Volex, which does half of its business in Asia, has been growing its profits strongly. It's another small cap company with low debts, and has a good 2012 expected with further strong growth pencilled in for 2013.
It's more of a classic growth story, with the company's first dividend expected this year, which ends in March, and that should hopefully be the start of regular payouts. And though the share price rose strongly to top 370p early in 2011, it has fallen back to around 250p now.
Invest in investment
Perhaps the best prospect of these five lies with Aberdeen Asset Management, which provides a range investment funds, and services for professional investors. The share price slumped during the financial crisis, but has recovered pretty strongly since. Over the past 12 months, it has soundly beaten the FTSE, but it may well have further to go -- and it has dropped back slightly from its recent peak, to 247p.
For the year ending September 2012, the City is expecting to see a 25% rise in earnings per share, with a further 15% or so forecast for the following year.
There was net cash on the books last September, and again, it's paying a good dividend too of around 4%, which is well covered.
Bullish or bearish?
So what does all this tell us? For me, one thing it shows is the unexpected results we can get when we run filters to look for specific kinds of shares.
But more importantly, when I see good dividend-paying shares with strong forecasts ahead of them and their prices so low that their PEGs fall to growth share levels, that tells me that we're in bargain share times and we should make the most of it.
I wouldn't rush out and buy any of these shares just on this, of course -- this is only the pick of my first screening. But I do think they're worth further research.
More from Alan Oscroft:
> The Motley Fool owns shares in Tesco.
