Think the FTSE 100 is for plodding blue-chip shares and that if you want serious growth potential you need to look outside the top index?
Think again.
There’s a ratio beloved of growth-seekers called the PEG (Price/Earnings/Growth), which divides the latest Price to Earnings ratio (P/E) by the forecast growth in earnings per share (EPS) for the next year-end — and anything below 0.7 is usually seen as a pretty strong indicator.
Here are four top-flight companies with PEGs lower than that:
Housing on the up
Housebuilder Persimmon (LSE: PSN), has seen its share price more than treble over the past five years, to 1,308p, as the recession has ended, mortgages are becoming available again, and housing demand is rising.
Even after that, Persimmon is on a P/E of only around 11, which is well below the FTSE’s average of 14. And with EPS growth of around 30% forecast for the year to December, we’re looking at a PEG of 0.37 — only around half the minimum that growth investors seek.
It’s even better at fellow builder Barratt Developments (LSE: BDEV). Barratt shares have risen at the same pace as Persimmon, to reach 375p. And again there’s more growth to come. With the shares on a P/E of close to 12% and EPS growth of 95% predicted, Barratt’s PEG is as low as 0.13! That growth is a one-off, but it still makes the shares look cheap.
Insurance doing well
The insurance sector has been recovering well, and that’s where we find our next growth candidate in Old Mutual (LSE: OML). Forecast earnings per share of 20p would give us a gain of 35% on normalised figures for 2013. At 204p, that’s for a share on a P/E of only 11 — giving us a PEG of 0.31, which again is less than half the typical 0.7 standard.
Old Mutual is one of the insurers that didn’t have to slash its dividends, so they’re motoring along with yields of better than 4%, too.
Entertainment
How about the company that should do well out of the World Cup, ITV (LSE: ITV)? The 180p share price gives us a P/E of an average 14, and with forecast EPS growth of 29%, ITV’s PEG comes out at 0.48. That’s higher than the others, but still very attractive.
And there’s continuing earnings growth for ITV forecast for the next four years (which is as far as any broker dares to go).
We need to be cautious of shorter-term PEG ratings like these, as they might not carry forward to future years — PEG investors are typically looking for several years of rapid growth.
Galloping elephants
But it does show us that there can be great growth spurts for even the big FTSE 100 companies, and that what goes up… erm… sometimes keeps going up!