In a market dealing with external shocks, value investing is fast gaining popularity. The success of value investors like Warren Buffett underscores this. Buffett and his business partner, Charlie Munger, managed to register a 20.1% CAGR for Berkshire Hathaway from 1965 through 2021. This favorably compares with a 10.5% rise of the S&P 500 Index during the same period.

Several other stocks, which have surged significantly in the recent past, have shown the overwhelming success of this pure-play investment strategy. Here we discuss five such stocks — Henry Schein (HSIC Quick QuoteHSIC - Free Report) , The Kroger Co. (KR Quick QuoteKR - Free Report) , Baidu (BIDU Quick QuoteBIDU - Free Report) , Toll Brothers Inc. (TOL Quick QuoteTOL - Free Report) and Arch Capital Group (ACGL Quick QuoteACGL - Free Report) .

More on Value Investing

While searching for a suitable investment option, value investors with a varied risk appetite are unlikely to consider the price/earnings to growth (PEG) ratio among several 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 a stock's future earnings growth potential. Yardsticks, such as dividend yield, P/E or P/B, are commonly used to single out stocks trading at a discount.

However, while not taking into account the growth potential of a stock, these ratios 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. 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 the five out of the 12 stocks that qualified the screening:

Henry Schein: Melville, NY-headquartered Henry Schein is a leading distributor of health care products and services across the globe. The company serves office-based dental, medical and animal health practitioners, dental laboratories, government as well as institutional health care clinics and other alternate-care sites. Presently, Henry Schein operates in 33 countries.

Henry Schein has a long-term expected growth rate of 8.1%. Henry Schein currently carries a Zacks Rank of 2 and has a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

Kroger: Cincinnati, OH-based Kroger operates supermarkets under banners including Kroger, City Market, Dillons, Food 4 Less, Fred Meyer, Fry's, Harris Teeter, Jay C, King Soopers, Mariano's, Pick 'n Save, QFC, Ralphs and Smith's. Further, it also manufactures and processes certain food products that are sold in its supermarkets.

Kroger currently holds a Zacks Rank #2 and has a Value Score of A. Kroger also has an impressive five-year historical growth rate of 15%.

Baidu:  Baidu offers Internet search services in China. It operates through Baidu Core and iQIYI segments. The company offers Baidu App to access search, feed, and other services using mobile devices; Baidu Search to access its search and other services; Baidu Feed that provides users with a personalized timeline based on their demographics and interests; and Haokan, a short video app.

Apart from a discounted PEG and P/E, Baidu currently sports a Zacks Rank #1 and has a Value Score of B. Baidu has a long-term expected growth rate of 19.2%.

Toll Brothers: Based in Horsham, PA, Toll Brothers builds single-family detached and attached home communities, master-planned luxury residential resort-style golf communities, and urban low, mid, and high-rise communities, principally on the land it develops and improves.

Toll Brothers has an impressive long-term expected growth rate of 23.9%. Toll Brothers stock currently has a Value Score of A and carries a Zacks Rank of 2.

Arch Capital: Headquartered in Pembroke, Bermuda, Arch Capital offers insurance, reinsurance and mortgage insurance across the world. Arch Capital classifies its operations into three underwriting segments and two operating segments (non-underwriting). The underwriting segments are Insurance, Reinsurance and Mortgage. The two operating (non-underwriting) segments are Other and Corporate.

Arch Capital currently holds a Zacks Rank #2 and has a Value Score of B. It also has an impressive five-year historical growth rate of 24.5%.

Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and backtesting software.

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.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report