NEW YORK (TheStreet) -- Like many teams in this month's "March Madness" college basketball tournament, computer chip manufacturer Qualcomm (QCOM - Get Report) is an underdog right now and if you can buy it for under $75, you could reap greater than 10% gains in the next year while collecting the 2.4% yield.
Must Read: Warren Buffett's Top 10 Dividend Stocks
The Baton algorithm does this vetting daily on more than 6,000 stocks by using the same calculations used by Warren Buffet, Peter Lynch and eight other all-time great investors. Check out the real-world results.
Qualcomm's Road to the Final Ten
Qualcomm stock peaked above $80 in July 2014 before losing 24% due to pessimistic guidance for the remainder of 2015. Since January, it has rebounded to $70 but remains undervalued.
Qualcomm management has driven some of that rebound by announcing plans to aggressively return capital to shareholders: by increasing the size of its quarterly dividend by 14% to $0.48 and expanding the amount of its share repurchase program by almost $13 billion ($10 billion of which will be spent within the next twelve months). That's a lot of cash the company will be handing over to its shareholders, and in the meantime, the company is working feverishly to recapture market share in Asia.
Qualcomm management has driven some of that rebound by announcing plans to aggressively return capital to shareholders: by increasing the size of its quarterly dividend by 14% to $0.48 and expanding the amount of its share repurchase program by almost $13 billion ($10 billion of which will be spent within the next twelve months). That's a lot of cash the company will be handing over to its shareholders, and in the meantime, the company is working feverishly to recapture market share in Asia.
Who Says QCOM Is Undervalued?
What made legendary investor Peter Lynch famous was his "PEG ratio" which compares a company's price-to-earnings ratio to the rate of growth in its earnings over the past five years. A ratio of less than 1.0 means that a company has been growing its earnings at a greater rate than the market is valuing its stock (the price-to-earnings ratio), which implies that the company is undervalued and should appreciate at a higher rate going forward than the overall market.
Qualcomm's PEG ratio of 0.63 is a very good score. That's calculated as Qualcomm's price-to-earnings ratio of 14.81 divided by its average historical growth rate over the last three-to-five years of 23.4%.
Baton's Peter Lynch model anchored by his "P/E Growth Investor" formula gives Qualcomm a score of 91%. (Anything over 90% is considered very good.)
Qualcomm passes five of Lynch's seven tests and is neutral on the other two: free cash flow and net cash to price ratio. Nonetheless, the Lynch model rates Qualcomm a strong buy at 91%.
Another legendary investor, Marty Zweig, took Lynch's methodology one step further and looked at the individual components of each of the PEG ratio variables to test for persistence and strength. In particular, he wanted to see that a company has been able to grow its earnings every year for the past five years (excluding extraordinary items). In the case of Qualcomm, the rate of growth of its earnings over the past five years has been (from earliest to most recent) 2.12%, 2.70%, 3.06%, 3.91% and 4.40%. In addition, he wanted to know that the rate of growth over that period was at least 15%, which Qualcomm easily beats with a long term earnings growth rate of 23.4%.
Baton's Zweig "Growth Investor" model gives Qualcomm a 92%. Qualcomm passes 12 out of Zweig's 13 tests.
Both Lynch and Zweig believed that the first duty of a company's management team was to devise a strategy for consistently growing earnings. By the numbers, Qualcomm is achieving that goal and should be rewarded by the market in the coming months.
For more on why we recommend you buy Qualcomm up to $75, watch this short video from Baton Chief Investment Officer, Jim Pearce.
By Phil Ash
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