Famed Fidelity Magellan fund manager Peter Lynch introduced an important method of valuing stocks in his bestselling book “One Up On Wall Street.”
In the book, Lynch uses a chart to map the price and earnings per share, aligning $1 in earnings with $15 in stock price. The optimal time to purchase a stock is when price falls below the earnings line.
GuruFocus’ Peter Lynch Screen displays companies that have historically had strong correlations between the price and earnings lines and are currently trading below the earnings line. The following are five of these stocks that also have a business predictability rating of 3 stars or higher.
Fossil Group (FOSL, Financial)
Watch and accessory maker Fossil continues to top the list of undervalued Peter Lynch stocks from when we reviewed the screen in June.
Over the past year, Fossil’s stock has tanked 41% and currently trades at $56.73 with a PE of 8.4. The Peter Lynch earnings line is at $101.40, indicating the stock is undervalued.
For the second quarter, Fossil reported earning $1.12 per share, up from 98 cents per share in the year-ago quarter. The company’s operating margin has remained steady at about 16% to 18% since 2010.
GuruFocus gives Fossil a business predictability rating of 4 out of 5 stars. Columbia Wanger (Trades, Portfolio) is the largest guru shareholder with a 2.66% stake, followed by Larry Robbins (Trades, Portfolio) with a 1.84% stake.
Alliance Holdings GP LP (AHGP, Financial)
Alliance Holdings owns and controls Alliance Resource Management, which is the managing general partner of Alliance Resource Partners LP. ARLP is a diversified producer of coal to U.S. utilities and industrial users.
The stock price has declined 46% over the last year and currently trades at $33.85, or 7.55x times earnings. This, combined, with GuruFocus’ business predictability rating of 3.5 stars, puts Alliance Holdings as an undervalued Peter Lynch stock. The Peter Lynch earnings line is at $68.80 based on second quarter earnings.
Alliance earned $1.02 per share during the second quarter of 2015, down from $1.29 per share in the same period last year.
The company pays a dividend yield of 10.83%, which is close to the 10-year high. The payout ratio is 81%.
Waddell & Reed Financial Inc. (WDR, Financial)
Waddell & Reed’s stock has declined 22% over the past year and currently trades at $34.57, which is 10x earnings. The Peter Lynch earnings line values the stock at $53.30.
Waddell & Reed is a mutual fund and asset management firm and also provides investment advisor services. During the second quarter, the company earned 80 cents per share, down from 98 cents per share in the year-ago quarter. On a yearly basis, however, Waddell & Reed had substantially increased earnings from $1.76 per share in 2012 to $3.71 per share in 2014.
The dividend yield is close to the five-year high at 4.99% with a 45% payout ratio. Chuck Royce (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) both hold the largest stakes among the gurus at 2.49%.
Franklin Resources (BEN, Financial)
Investment management company Franklin Resources has seen its stock decline 24% over the last year. It currently trades at 10.22x earnings at $38.15. GuruFocus rates the business predictability as 3.5 out of 5 stars based on consistent revenue and earnings growth.
The Peter Lynch earnings line is at $56.90, indicating the stock is undervalued.
Earnings per share have increased steadily since FY 2009 as indicated in the graph below. In 2014 Franklin Resources earned $3.79 per share.
Franklin Resources’ dividend yield is near the five-year high at 1.53%, with a payout ratio of 15%. Mason Hawkins (Trades, Portfolio) the largest guru shareholder with a 1.34% stake, followed by Bill Nygren (Trades, Portfolio) with a 0.88% stake.
Over the past year, apparel company Gap’s stock has declined 25%. It currently trades at $27.10 at 10.29x earnings. The Peter Lynch earnings line is at $41.20, indicating Gap is undervalued.
For the second quarter, Gap earned 52 cents per share, a decline from 75 cents per share in the year-ago quarter. The company recently made business headlines when its Banana Republic brand posted the seventh decline in same-store sales in eight months. The brand’s creative director, formerly of J.Crew, stepped down from her role.
Gap pays a dividend yield of 3.32% — close to the 10-year high — while the payout ratio is 34%. Larry Robbins (Trades, Portfolio) is the largest guru shareholder with a 1.47% stake. He is followed by James Barrow (Trades, Portfolio) with a 0.54% stake, and Edward Lampert (Trades, Portfolio) with 0.51%.
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