Stock Focus: Bargains In High-Growth Stocks

“People are much more interested in the price-to-earnings-growth ratio (PEG) than they were five years ago,” says Grace Keeney Fey, portfolio manager at Boston-based Frontier Capital Advisors.

Indeed, the PEG ratio, calculated by dividing a stock’s estimated price-to-earnings multiple by its long-term growth estimate, is routinely discussed on several investment-oriented Web sites.

Why all the attention? By giving a sense of how a stock trades relative to its long-term growth potential, the PEG helps investors sniff out potential bargains among stocks that are richly valued on a price-to-earnings ratio (P/E) basis. Plus, there’s simplicity–a widely used rule of thumb says that a stock is undervalued if its PEG falls below one and overvalued if above one.

Given the market’s jumpiness over the past two months, Wall Street pros say that investors should pay extra attention to the quality of earnings estimates and growth forecasts when making decisions based on a PEG figure. “You have to be sure of those earnings,” says Fey, who adds, “You’re dealing with high-multiple stocks and, these days, there’s no mercy for disappointments.”

Full story at Forbes.com

Stock Focus: Medical Supply Companies

NEW YORK – Since April, the S&P Medical Products and Supplies index is up 17% versus the Nasdaq’s 19% decline. IBES International analysts project profits for this group will grow 18% this year and 25% in 2001.

Unlike manufacturers of prescription drugs and providers of health-care services–which are facing increased political pressure and government scrutiny–the medical supplies industry hasn’t been subjected to the same cost-cutting demands. “There’s not a lot of Medicare and other regulatory risk now,” says Glenn Reicin, managing director at Morgan Stanley Dean Witter, about medical supply companies.

Haemonetics (nyse: HAE – news – people) recently had some good news from federal regulators: The company won clearance from the Federal Drug Administration to market a blood filtering system that could double the number of red blood cells harvested from a blood donor. For the quarter ending Sept. 30, Haemonetics’ earnings rose 25%, to 26 cents a share, over the same period last year. (Note: Latest results are before a one-time charge attributed to the acquisition of Transfusion Technologies.) Haemonetics shares trade at just 18 times estimated 2001 earnings of $1.40 a share.

Full story at Forbes.com

Stock Focus: Internet Consulting Companies

NEW YORK – It has been a rough couple of months for stocks of Internet consulting companies. Former stars like Razorfish now trade at a fraction of their 52-week highs.

“The fourth quarter is not going to be an easy one for this group of stocks either,” warns Steven Birer, senior e-services analyst at Robertson Stephens.

Robert St. Jean, Internet and information technology services analyst at J.P. Morgan, points to several sector difficulties, including a drop-off in information technology spending by both dot-com and legacy companies, heavy staff turnover brought on by underwater stock options, and pressure to reduce fees. “When that sense of urgency goes away,” St. Jean notes,” clients tend to be a little more price sensitive.”

St. Jean thinks that the industry’s problems are short term in nature and will be offset by new demands, notably the development and implementation of wireless technologies.

Full story at Forbes.com

Stock Focus: Food Processing Companies

NEW YORK – Within the past 12 months General Mills anted up $10.5 billion to buy Diageo’s Pillsbury food unit, European food and consumer products giant Unilever spent $21 billion to gobble up Bestfoods, and Philip Morris dropped $15 billion for Nabisco.

What’s going on here?

“To stay competitive in the food business, you need a broad array of market-leading products in growing, on-trend categories,” says Romitha Mally, packaged foods analyst at Goldman Sachs. “Size gives a company muscle with retailers,” adds David Nelson of Credit Suisse First Boston.

The enterprise multiple is a good guideline for what acquirers pay for food companies. The enterprise value of a company–the market value plus total debt and the liquidation value of preferred stocks minus cash and equivalents–represents the minimum price an acquiring firm must pay to buy another publicly traded company. The enterprise multiple is the ratio of enterprise value to a company’s operating income, or earnings before interest, taxes, depreciation and amortization.

Unilever (nyse: UN – news – people), for example, paid an enterprise multiple of 14 for Bestfoods (nyse: BFO – news – people). Using that deal as a guideline, we sought out food companies with enterprise multiples of 14 or less. All the companies on our list are profitable, trade below their 52-week highs, carry estimated 2001 price-to-earnings ratios below 22 and have projected three- to five-year earnings growth of 10% or higher.

Full story at Forbes.com