Former Magellan fund manager Peter Lynch devised a method of determining whether stocks are over or undervalued by equating $1 in earnings with $15 in stock price. The earnings line was introduced in his best-selling book “One Up on Wall Street.”
A graph comparing the Peter Lynch earnings line with the actual stock price can be found on the summary pages of each stock on GuruFocus. The Peter Lynch Screen is also available to automatically search for high-performing undervalued stocks. Five of these picks are listed below.
Alliance Holdings GP LP (AHGP, Financial)
After tanking 70% in the past year, Alliance Holdings’ stock is widely undervalued, according to the Peter Lynch earnings line, which estimates the price at $53 compared to the price of $15.68 as of Tuesday morning.
Alliance Holdings is a limited partnership formed to own Alliance Resource Management, the managing general partner of Alliance Resource Partners, which is a producer and marketer of coal to U.S. utilities and industrial users.
In 2015, Alliance Holdings had net income of $211.3 million, down from $284.4 million the year before. Operating expenses were up year over year due to increases in transportation costs, as well as the cost of depreciation, depletion and amortization.
Jim Simons (Trades, Portfolio) is the only guru shareholder of the company with more than 136,000 shares.
Gilead Sciences Inc. (GILD, Financial)
The Peter Lynch earnings line estimates Gilead’s price as $178.90 while the stock trades at $95.77 or 8x earnings. Gilead has traded down by 6% in the past year.
Net income in 2015 was $18.1 billion, a good improvement over $12.1 billion the year before. Total product sales increased during the year primarily due to sales of Harvoni, which launched in October 2014. Antiviral product sales, which includes products in HIV and liver diseases, also increased during the fourth quarter compared to the year-ago period.
During the fourth quarter, the European Commission granted marketing approval for Genvoya, an HIV treatment, and it also received approval from the FDA.
Pioneer Investments (Trades, Portfolio) is the main guru shareholder with more than 3.3 million shares, followed by Simons and John Rogers (Trades, Portfolio).
Fossil Group (FOSL, Financial)
After seeing its stock fall by half over the past year, Fossil trades at 8.6x earnings, and the Peter Lynch earnings line values the company at about $67.80.
Fossil’s watch brands include Michael Kors, Kate Spade and Tory Burch. It also made a high-profile acquisition of fitness watch brand Misfit in November.
In the fourth-quarter commentary, Wallace Weitz (Trades, Portfolio) of the Weitz Partners Value Fund wrote that the stock was weighed down by low foot traffic in malls and department stores, as well as uncertainty in the consumer environment. Weitz, however, said he views these as cyclical not secular headwinds.
EPS in the fourth quarter was $1.46, half its reported earnings in the prior-year quarter. Fossil’s business predictability is rated 4 out of 5 stars by GuruFocus, though this is under review as indicated by the red outline.
Hibbett Sports Inc. (HIBB, Financial)
The athletic retailer trades at 11.47x earnings after declining by 30% over the past year. The Peter Lynch earnings line values the stock at $43.80.
GuruFocus rates the business predictability as an excellent 5 stars. For the fourth quarter 2016, however, comparable store sales declined by 0.6% year over year, and gross profit also declined slightly during the quarter.
For the fiscal year 2016 ended Jan. 30, Hibbett opened 71 new stores and closed 15 underperforming stores.
Joel Greenblatt (Trades, Portfolio) is the largest guru shareholder of Hibbett with a 2.48% stake, followed by Simons and Barrow, Hanley, Mewhinney & Strauss with smaller holdings.
Bed Bath & Beyond (BBBY, Financial)
The home furnishings and domestic products company dropped 35% in the past year and now trades at 9x earnings. At its price of $47.43 as of Wednesday morning, it is also undervalued by the Peter Lynch earnings line, which estimates the stock at $77.10.
During the fourth quarter, net sales were $3.4 billion, a 2.4% increase from the prior-year quarter. Earnings per diluted share were $1.91, an improvement over earnings of $1.80 in the comparable year quarter.
Hotchkis & Wiley holdings the largest stake among the gurus at 4.41%. Other notable gurus include Chuck Royce (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio) and Greenblatt.
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