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7 Great Value Picks Based on Discounted PEG

In a market hurt by external shocks, value investing is fast gaining popularity. The success of value investors like Warren Buffett further underscores this. Buffett and his business partner, Charlie Munger managed to register 20% compound annual growth in the market value of Berkshire Hathaway from 1965 through 2020 compared with 10.2% rise of the S&P 500 during the same period.

However, while searching for a suitable investment option, value investors with varied risk appetite are unlikely to consider price/earnings to growth (PEG) ratio among a number of other popular metrics like price/earnings (P/E), price/sales (P/S) or price/book value (P/B).

This is because they often find this ratio complicated, considering the limitations in calculating the future earnings growth potential of a stock. Yardsticks, such as dividend yield, P/E or P/B, are most commonly used to single out stocks trading at a discount.

However, these ratios, while not taking into account the future growth potential of a stock, might end up convincing us to invest in stocks that are at a discount just because of their poor show. This might often lead to “value traps” — a situation when these value picks start to underperform over the long run as the temporary problems, which once pulled down the share price, turn out to be persistent.

In such a case, even if you buy a stock at less than its fair value, you might still end up paying more. And here comes the importance of this not-so-popular but crucial value investing metric, the PEG ratio.

The PEG ratio is defined as: (Price/ Earnings)/Earnings Growth Rate

A low PEG ratio is always better for value investors.

While P/E alone fails to identify a true value stock, PEG helps find the intrinsic value of a stock.

There are some drawbacks to using the PEG ratio though. It doesn’t consider the very common situation of changing growth rates, such as the forecast of the first three years at a very high growth rate, followed by a sustainable but lower growth rate over the long term.

Hence, PEG-based investing can turn out to be even more rewarding if some other relevant parameters are also taken into consideration.

Here are some of the screening criteria for a winning strategy:

PEG Ratio less than X Industry Median

P/E Ratio (using F1) less than X Industry Median (for more accurate valuation purpose)

Zacks Rank of 1 (Strong Buy) or 2 (Buy) (Whether good market conditions or bad, stocks with a Zacks Rank #1 or 2 have a proven history of success.)

Market Capitalization greater than $1 Billion (This helps us to focus on companies that have strong liquidity.)

Average 20 Day Volume greater than 50,000 (A substantial trading volume ensures that the stock is easily tradable.)

Percentage Change F1 Earnings Estimate Revisions (4 Weeks) greater than 5% (Upward estimate revisions add to the optimism, suggesting further bullishness.)

Value Score of less than or equal to B: Our research shows that stocks with a Style Score of A or B when combined with a Zacks Rank #1, 2 or 3 (Hold) offer the best upside potential. 

Here are seven out of the 50 stocks that qualified the screening:

Santander Consumer USA Holdings Inc. SC: This is a full-service consumer finance company focused on vehicle finance, third-party servicing and delivering superior service to more than 3.1 million customers across the full credit spectrum. Santander Consumer USA has a long-term historical growth rate of 19.7%. The stock currently carries a Zacks Rank of 1 and has a Value Score of B. You can see https://www.zacks.com/stocks/buy-list/?ADID=zp_1link_invidea...">the complete list of today’s Zacks #1 Rank stocks here.

ManpowerGroup Inc. MAN: It is one of the leading providers of innovative workforce solutions and services across the globe. ManpowerGroup provides its wide range of staffing solutions as well as engagement and consulting services.  The company currently holds a Zacks Rank #2 and has a Value Score of A. It also has an impressive five-year expected growth rate of 21.7%.

Equinor ASA EQNR: It is one of the premier integrated energy companies in the world, with operations spreading across 30 countries. In Europe, the company is the second-largest supplier of natural gas. Equinor is also a leading seller of crude oil. Apart from a discounted PEG and P/E, the stock currently sports a Zacks Rank #1 and has a Value Score of A.

Boise Cascade Company BCC: This company is one of the largest producers of engineered wood products and plywood in North America and a leading U.S. wholesale distributor of building products. It has an impressive long-term historical growth rate of 32.4%. The stock currently has a Value Score of A and carries a Zacks Rank of 1.

Owens Corning OC: This is a building materials systems and composite solutions company. Its products include glass fiber that is used to support composite materials for transportation, electronics, marine, infrastructure, wind energy and other high-performance markets for insulation as well as roofing for residential, commercial and industrial applications. The company currently holds a Zacks Rank #1 and has a Value Score of B. It also has an impressive five-year expected growth rate of 14.1%.

Encompass Health Corporation EHC: This company is a provider of integrated healthcare services. It offers both facility-based and home-based patient care through its network of inpatient rehabilitation hospitals, home health agencies and hospice agencies. Apart from a discounted PEG and P/E, the stock currently sports a Zacks Rank #1 and has a Value Score of B.

Dow Inc. DOW: This is a material science company, providing a world-class portfolio of advanced, sustainable and leading-edge products. The company is currently investing in a number of high-return growth projects including the expansion of downstream silicones capacity. The company currently holds a Zacks Rank #1 and has a Value Score of B. It also has an impressive five-year expected growth rate of 19.3%.

You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.

The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.

Click here to sign up for a free trial to the Research Wizard today.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.


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ManpowerGroup Inc. (MAN): Free Stock Analysis Report
 
Dow Inc. (DOW): Free Stock Analysis Report
 
Owens Corning Inc (OC): Free Stock Analysis Report
 
Santander Consumer USA Holdings Inc. (SC): Free Stock Analysis Report
 
Boise Cascade, L.L.C. (BCC): Free Stock Analysis Report
 
Encompass Health Corporation (EHC): Free Stock Analysis Report
 
Equinor ASA (EQNR): Free Stock Analysis Report
 
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