November 18, 2024 (Maple Hill Syndicate) Here's a stockpicking tool you might not have thought about. It's called the PEG ratio.

The PEG ratio is a ratio of two ratios:

The numerator, or top line, is a stock's price/earnings ratio, expressed simply as a number. This is the stock's price divided by per-share earnings. If Superlative Entertainment shares sell for $40 and the company's profits are $4 a share, the price/earnings ratio is 10.

The denominator (divisor, or bottom number) is the stock's growth rate, expressed simply as a number. If Superlative Entertainment is growing its earnings at 20% a year, the denominator is 20.

So, Superlative Entertainment's PEG ratio would be 10 divided by 20, or 0.5. That's a very good ratio indeed.

The classic way to use the PEG ratio is to look for stocks with a PEG ratio less than 1.0. Only about 10% of U.S. stocks currently can jump that hurdle.

Here are five that I think deserve consideration.

Applied Materials

Applied Materials Inc. (NASDAQ:AMAT), based in Santa Clara, California, is the world's second largest maker of semiconductor manufacturing equipment. The largest is AMSL Holding NV (NASDAQ:ASML), with headquarters in the Netherlands.

Applied Materials sells for about 19 times earnings and its five-year earnings growth rate is about 21%. That produces a PEG ratio of 0.90. The question is whether the company has hit a wall. Last year, growth slowed to 3% for revenue and 6% for profits.

If the current trade tension between the U.S. and China turns into an outright trade war, it would slam Applied Materials, which gets a sizeable chunk of revenue from China. On balance, I think it's a risk worth taking.

Regeneron

Regeneron Pharmaceuticals Inc. (NASDAQ:REGN), based in Tarrytown, New York, concentrates on drugs to combat eye disease, heart disease, cancer and inflammation. Its after-tax profit margin is a nice fat 33%. Its PEG ratio is 0.98.

Regeneron does sell some drugs in China, but I believe it would be less impacted by a potential trade war than most technology companies would be. The stock sells for about $757 and the average one-year target among Wall Street analysts is $1,093. Of 29 analysts who follow it, 21 rate it a buy.

NVR

NVR Inc. (NYSE:NVR) is a homebuilder whose stock I owned for about six years (2012-2018). During that time, it was one of the best gainers I've ever had. Probably I shouldn't have parted with it, since it's up 147% in the past five years.

NVR builds houses in 14 states, but gets a lot of its revenue (about 22%) from the Washington D.C. area. Under both Republican and Democratic administrations, the federal government has grown, helping to keep housing demand in the D.C. area strong.