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The investing track of the Oracle of Omaha over the past few decades shows a gradual shift from being a pure-play value investor to a GARP (growth at a reasonable price) investor. The logic behind this is the effectiveness of a mixed investment strategy over pure-play, value or growth approaches of investments.
Several stocks, which have surged significantly in the recent past, show an overwhelming success of this hybrid investing strategy over pure-play value and growth investments. Here we will discuss the success of five such stocks. These include Dell Technologies (DELL - Free Report) , HF Sinclair Corporation (DINO - Free Report) , Futu Holdings (FUTU - Free Report) , BAE Systems plc (BAESY - Free Report) and American Eagle Outfitters (AEO - Free Report) .
A Few More Words on GARP
The GARP theory enables the strategic mingling of growth and value-investing principles, giving us a hybrid strategy by utilizing the best features of both. What GARPers look for is whether or not the stocks are somewhat undervalued and have solid sustainable growth potential (Investopedia).
GARP investing gives priority to one of the popular value metrics — the price/earnings growth (PEG) ratio. Although it is categorized under value investing, this strategy follows the principles of both growth and value investing.
The PEG ratio is defined as (Price/ Earnings)/Earnings Growth Rate
It relates the stocks’ P/E ratio with the future earnings growth rate.
While P/E alone only gives an idea of stocks that are trading at a discount, PEG, while adding the growth element to it, helps to identify stocks that have solid future potential.
A lower PEG ratio, preferably less than 1, is always better for GARP investors.
Say for example, if a stock's P/E ratio is 10 and the expected long-term growth rate is 15%, the company's PEG will come down to 0.66, a ratio that indicates both undervaluation and future growth potential.
However, the question that often arises is whether the market has an adequate number of companies that are growing earnings while trading at reasonable valuations? Going by a CFA Institute Blog by Nicolas Rabener, “on average, 38% of all stocks exhibit a PEG ratio below 1, which is more than enough for security selection.”
Unfortunately, this ratio is often neglected due to investors' limitations in calculating the future earnings growth rate of a stock.
There are some drawbacks to using the PEG ratio though. It does not consider the 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 in 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 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 purposes)
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 $800 Million (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 five out of the seven stocks that qualified the screening:
Dell: It designs, develops, manufactures, markets, sells, and supports various comprehensive and integrated solutions, products, and services in the Americas, Europe, the Middle East, Asia, and internationally. The company’s Infrastructure Solutions Group segment provides traditional and next-generation storage solutions. The Client Solutions Group segment provides desktops, workstations and notebooks; displays, docking stations, and other electronics; and third-party software and peripherals, as well as support and deployment, configuration and extended warranty services.
Dell currently holds a Zacks Rank #1 and has a Value Score of A. It also has an impressive five-year expected growth rate of 12%.
HF Sinclair: The company is headquartered in Dallas, TX, is an independent energy company that produces and markets high value light products such as gasoline, diesel fuel, jet fuel, renewable diesel and other specialty products. HF Sinclair owns and operates refineries located in Kansas, Oklahoma, New Mexico, Wyoming, Washington and Utah and markets its refined products primarily in the Southwest U.S. and the Rocky Mountains, extending into the Pacific Northwest and in other neighboring Plains states.
HF Sinclair is an impressive value investment pick with its Zacks Rank #1 and a Value Score of A. Apart from a discounted PEG and P/E, it also has an impressive long-term historical growth rate of 35.8%.
Futu: It provides digitalized securities brokerage and wealth management product distribution service in Hong Kong and internationally. It offers online financial services, including securities and derivative trades brokerage, margin financing and fund distribution services through its Futubull and Moomoo digital platforms.
Futu can also be an impressive value investment pick with its Zacks Rank #1 and a Value Score of B. Apart from a discounted PEG and P/E, the stock has an impressive long-term expected growth rate of 17.1%. You can see the complete list of today’s Zacks #1 Rank stocks here.
BAE Systems: It provides defense, aerospace and security solutions worldwide. The company operates through five segments: Electronic Systems, Cyber & Intelligence, Platforms & Services (US), Air, and Maritime.
BAE Systems has an impressive long-term historical growth rate of 14%. The stock currently has a Value Score of B and a Zacks Rank #1.
American Eagle: Based in Pittsburgh, PA, American Eagle is a specialty retailer of casual apparel, accessories and footwear for men and women aged 15–25 years. American Eagle, along with its subsidiaries, engages in the designing and marketing of casual clothing. The company’s assortment includes jeans, cargo pants, graphic T-shirts as well as a range of accessories, outerwear and footwear.
American Eagle has an impressive long-term historical growth rate of 15.3%. The stock currently has a Value Score of A and a Zacks Rank #1.
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.
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.
Image: Bigstock
5 Lucrative PEG-Driven GARP Stocks for Investors
The investing track of the Oracle of Omaha over the past few decades shows a gradual shift from being a pure-play value investor to a GARP (growth at a reasonable price) investor. The logic behind this is the effectiveness of a mixed investment strategy over pure-play, value or growth approaches of investments.
Several stocks, which have surged significantly in the recent past, show an overwhelming success of this hybrid investing strategy over pure-play value and growth investments. Here we will discuss the success of five such stocks. These include Dell Technologies (DELL - Free Report) , HF Sinclair Corporation (DINO - Free Report) , Futu Holdings (FUTU - Free Report) , BAE Systems plc (BAESY - Free Report) and American Eagle Outfitters (AEO - Free Report) .
A Few More Words on GARP
The GARP theory enables the strategic mingling of growth and value-investing principles, giving us a hybrid strategy by utilizing the best features of both. What GARPers look for is whether or not the stocks are somewhat undervalued and have solid sustainable growth potential (Investopedia).
GARP investing gives priority to one of the popular value metrics — the price/earnings growth (PEG) ratio. Although it is categorized under value investing, this strategy follows the principles of both growth and value investing.
The PEG ratio is defined as (Price/ Earnings)/Earnings Growth Rate
It relates the stocks’ P/E ratio with the future earnings growth rate.
While P/E alone only gives an idea of stocks that are trading at a discount, PEG, while adding the growth element to it, helps to identify stocks that have solid future potential.
A lower PEG ratio, preferably less than 1, is always better for GARP investors.
Say for example, if a stock's P/E ratio is 10 and the expected long-term growth rate is 15%, the company's PEG will come down to 0.66, a ratio that indicates both undervaluation and future growth potential.
However, the question that often arises is whether the market has an adequate number of companies that are growing earnings while trading at reasonable valuations? Going by a CFA Institute Blog by Nicolas Rabener, “on average, 38% of all stocks exhibit a PEG ratio below 1, which is more than enough for security selection.”
Unfortunately, this ratio is often neglected due to investors' limitations in calculating the future earnings growth rate of a stock.
There are some drawbacks to using the PEG ratio though. It does not consider the 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 in 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 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 purposes)
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 $800 Million (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 five out of the seven stocks that qualified the screening:
Dell: It designs, develops, manufactures, markets, sells, and supports various comprehensive and integrated solutions, products, and services in the Americas, Europe, the Middle East, Asia, and internationally. The company’s Infrastructure Solutions Group segment provides traditional and next-generation storage solutions. The Client Solutions Group segment provides desktops, workstations and notebooks; displays, docking stations, and other electronics; and third-party software and peripherals, as well as support and deployment, configuration and extended warranty services.
Dell currently holds a Zacks Rank #1 and has a Value Score of A. It also has an impressive five-year expected growth rate of 12%.
HF Sinclair: The company is headquartered in Dallas, TX, is an independent energy company that produces and markets high value light products such as gasoline, diesel fuel, jet fuel, renewable diesel and other specialty products. HF Sinclair owns and operates refineries located in Kansas, Oklahoma, New Mexico, Wyoming, Washington and Utah and markets its refined products primarily in the Southwest U.S. and the Rocky Mountains, extending into the Pacific Northwest and in other neighboring Plains states.
HF Sinclair is an impressive value investment pick with its Zacks Rank #1 and a Value Score of A. Apart from a discounted PEG and P/E, it also has an impressive long-term historical growth rate of 35.8%.
Futu: It provides digitalized securities brokerage and wealth management product distribution service in Hong Kong and internationally. It offers online financial services, including securities and derivative trades brokerage, margin financing and fund distribution services through its Futubull and Moomoo digital platforms.
Futu can also be an impressive value investment pick with its Zacks Rank #1 and a Value Score of B. Apart from a discounted PEG and P/E, the stock has an impressive long-term expected growth rate of 17.1%. You can see the complete list of today’s Zacks #1 Rank stocks here.
BAE Systems: It provides defense, aerospace and security solutions worldwide. The company operates through five segments: Electronic Systems, Cyber & Intelligence, Platforms & Services (US), Air, and Maritime.
BAE Systems has an impressive long-term historical growth rate of 14%. The stock currently has a Value Score of B and a Zacks Rank #1.
American Eagle: Based in Pittsburgh, PA, American Eagle is a specialty retailer of casual apparel, accessories and footwear for men and women aged 15–25 years. American Eagle, along with its subsidiaries, engages in the designing and marketing of casual clothing. The company’s assortment includes jeans, cargo pants, graphic T-shirts as well as a range of accessories, outerwear and footwear.
American Eagle has an impressive long-term historical growth rate of 15.3%. The stock currently has a Value Score of A and a Zacks Rank #1.
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.