2 stocks to buy and 3 to sell

Cochlear Limited (ASX:COH), Ramsay Health Care Limited (ASX:RHC), CSL Limited (ASX:CSL), Ansell Limited (ASX:ANN) and QBE Insurance Group Ltd (ASX:QBE) are all leading companies but which ones should you own?

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The combination of recent market gyrations and the upcoming August reporting season make now a good time for investors to review their portfolio and consider how they are positioned.

While all of the following five stocks could be considered high quality and worthy of a 'buy-and-never-sell' strategy; investors may consider whether it is worth selling the following three stocks.

All of which have forecast earnings per share (EPS) growth rates below their forecast price-to-earnings (PE) ratios.

Cochlear Limited (ASX: COH) – In the current 2016 financial year (FY), this leading medical device company is forecast to grow EPS at 14.7%. Meanwhile, it trades on a forecast PE of 27.9x.

Ramsay Health Care Limited (ASX: RHC) – Australia's leading private hospital operator is forecast to increase EPS by 14.8% in FY 2016; it trades on a forecast PE of 27.6x.

CSL Limited (ASX: CSL) – EPS growth of just 8.2% is forecast in FY 2016 for this biopharma group. Investors need to determine if a forecast PE of 23.3x supports this single-digit growth rate.

Comparing EPS growth and PE ratios is neatly analysed by using the PEG ratio. Users of a PEG ratio are generally drawn towards stocks trading on PEGs close to or below 1. The following three stocks could fit that bill.

Ansell Limited (ASX: ANN) – This latex manufacturer has a FY 2016 EPS forecast growth rate of 12.8% which places the stock on a forward PE of 13.3x which is very close to a PEG of 1.

QBE Insurance Group Ltd (ASX: QBE) – Analysts are forecasting improved earnings for this global insurer with EPS in FY 2016 expected to grow by 29.6%. This places QBE on a seemingly undemanding PE of 13.4x.

Admittedly there are problems with using a PEG ratio but it can offer a starting point for investors when trying to determine if a stock may be over, under or fair value.

Looking for a stock which looks decidedly undervalued?

Motley Fool contributor Tim McArthur has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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