"Man finds Picasso original in thrift store"
"Woman buys original Renoir painting for $7"
Above are two true headlines about people finding art treasures and buying them at ridiculous prices. The buyers themselves didn't know what they had at first, but later on the true value was revealed.
You don't have the same kind of treasure finds with stocks (unless your late uncle left old stock certificates in a safety deposit box). However, the future value of stocks can be just as unclear and surprising sometimes.
We're always certain about the price since we can look that up, but the value is the real question. What will these two stocks be worth over the next decade?
Ansell Limited (ASX: ANN) is currently trading at around 17x earnings and offers a 1.9% unfranked yield. The maker of plastic gloves and other protective wear has a decent track record for solid earnings growth, but could it be cheap at today's price? Analysts forecast earnings growth of an average 21% annually over the next few years.
That puts the price/earnings to growth (PEG) ratio below 1. That indicates Ansell could be selling at a bargain price because the rate of expected growth is greater than the PE ratio. Customers like hospitals use, dispose of and repurchase Ansell's products over and over, so the company could have stable income streams for many years.
G8 Education Ltd (ASX: GEM), the childcare centre operator, is similar. Its PEG ratio is below 1. It's trading at 18x earnings, but analysts expect it to grow annual earnings around 30% on average in the next two years. The company is in an acquisition phase where it is buying blocks of childcare centres and raising its centre numbers quickly.
In financial year 2014 alone it added 203 new centres, bringing its total to 437 at the end of December. Why isn't the stock's PE ratio up higher? Possibly, the market may be concerned whether G8 Education can keep up this quick expansion pace. Still, in a highly fragmented industry like childcare services, even if the growth slows a little, there is a lot of room left to grow into. G8 Education could be a long-term growth story as long as it keeps its finances strong and its debt manageable.
