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The idea of value investing is gaining popularity with each passing day, thanks to the winning trail of the world’s most successful value investor Warren Buffett. The strategy was instrumental in making him one of the richest persons globally. If we delve deeper into Buffett’s strategy, it will not be difficult to realize the significance of the “intrinsic value” of a stock.
One wonders how this strategy has managed to be the fundamental value investing mantra for so long despite the uncertainties in the market. The answer is apparently simple – pick stocks which the market is currently undervaluing. Yardsticks such as dividend yield, the ratio of price to earnings or to book value are the most common forms of intrinsic value calculation, which can easily single out whether a stock is trading at a discount.
But what if there is a dearth of catalysts to propel growth even though the stock is cheap? In such a case, if you buy a stock at less than its fair value, you might still end up paying more. To avoid such value traps, Buffett has advised investors to keep a focus on the earnings growth potential of a stock. And here comes the importance of a not-so-popular value investing metric, the PEG ratio.
The PEG ratio is defined as: (Price/ Earnings)/ Earnings Growth Rate
A lower PEG ratio is always better for value investors.
While P/E alone fails to identify a true value stock, PEG helps finding the intrinsic value of a stock.
Unfortunately, this ratio is often neglected due to investors’ limitation to calculate the future earnings growth rate 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 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 purpose.)
Zacks Rank of 1(Strong Buy) 2 (Buy) or 3 (Hold) (whether good market conditions or bad, stocks with a Zacks Rank #1 #2 or #3 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 offer the best upside potential.
Here are five of the nine stocks that qualified the screening:
Baxter International Inc. (BAX - Free Report) : This is a renowned medical product company. We believe that Baxter’s expanding product pipeline is a key growth catalyst. Newly launched products like SIGMA SPECTRUM infusion pump and AMIA APD cycler with SHARESOURCE two-way connectivity are expected to drive top-line growth in the near term. Baxter can be an impressive value investment pick with its Zacks Rank #2 and Value Style Score ‘B’. The company’s long-term expected earnings growth rate is at 12.3%.
Rio Tinto plc (RIO - Free Report) : This popular name in the mining and metals market mines and produces aluminum products, copper, gold, silver, and molybdenum, nickel, and diamonds among others. The company can be an impressive value investment pick with its Zacks Rank #1 and Value Style Score ‘B’. Apart from a discounted PEG and P/E, the stock also has an impressive expected growth rate of 7% for the next fiscal.
POSCO (PKX - Free Report) : POSCO is a steel rolled products and plates provider in South Korea and internationally. This Zacks Rank #2 and Value Style Score ‘A’ company also has an impressive growth rate of 23.5% for the next fiscal. You can see the complete list of today’s Zacks #1 Rank stocks here.
Telenor ASA (TELNY - Free Report) : This provider of telecommunication, data, and media communication services in the Nordics, Central and Eastern Europe, and Asia can also be an impressive value investment pick with its Zacks Rank #3 and Value Style Score ‘A’.
International Game Technology PLC (IGT - Free Report) : This global leader in gaming provides technology products and services across lotteries, electronic gaming machines, sports betting, and interactive gaming markets worldwide. The company holds a Zacks Rank #3 and a Value Style Score ‘A’. The company has delivered a trailing four-quarter average positive earnings surprise of 36.7%.
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.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »
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5 Low PEG Stocks That Value Investors Will Love
The idea of value investing is gaining popularity with each passing day, thanks to the winning trail of the world’s most successful value investor Warren Buffett. The strategy was instrumental in making him one of the richest persons globally. If we delve deeper into Buffett’s strategy, it will not be difficult to realize the significance of the “intrinsic value” of a stock.
One wonders how this strategy has managed to be the fundamental value investing mantra for so long despite the uncertainties in the market. The answer is apparently simple – pick stocks which the market is currently undervaluing. Yardsticks such as dividend yield, the ratio of price to earnings or to book value are the most common forms of intrinsic value calculation, which can easily single out whether a stock is trading at a discount.
But what if there is a dearth of catalysts to propel growth even though the stock is cheap? In such a case, if you buy a stock at less than its fair value, you might still end up paying more. To avoid such value traps, Buffett has advised investors to keep a focus on the earnings growth potential of a stock. And here comes the importance of a not-so-popular value investing metric, the PEG ratio.
The PEG ratio is defined as: (Price/ Earnings)/ Earnings Growth Rate
A lower PEG ratio is always better for value investors.
While P/E alone fails to identify a true value stock, PEG helps finding the intrinsic value of a stock.
Unfortunately, this ratio is often neglected due to investors’ limitation to calculate the future earnings growth rate 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 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 purpose.)
Zacks Rank of 1(Strong Buy) 2 (Buy) or 3 (Hold) (whether good market conditions or bad, stocks with a Zacks Rank #1 #2 or #3 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 offer the best upside potential.
Here are five of the nine stocks that qualified the screening:
Baxter International Inc. (BAX - Free Report) : This is a renowned medical product company. We believe that Baxter’s expanding product pipeline is a key growth catalyst. Newly launched products like SIGMA SPECTRUM infusion pump and AMIA APD cycler with SHARESOURCE two-way connectivity are expected to drive top-line growth in the near term. Baxter can be an impressive value investment pick with its Zacks Rank #2 and Value Style Score ‘B’. The company’s long-term expected earnings growth rate is at 12.3%.
Rio Tinto plc (RIO - Free Report) : This popular name in the mining and metals market mines and produces aluminum products, copper, gold, silver, and molybdenum, nickel, and diamonds among others. The company can be an impressive value investment pick with its Zacks Rank #1 and Value Style Score ‘B’. Apart from a discounted PEG and P/E, the stock also has an impressive expected growth rate of 7% for the next fiscal.
POSCO (PKX - Free Report) : POSCO is a steel rolled products and plates provider in South Korea and internationally. This Zacks Rank #2 and Value Style Score ‘A’ company also has an impressive growth rate of 23.5% for the next fiscal. You can see the complete list of today’s Zacks #1 Rank stocks here.
Telenor ASA (TELNY - Free Report) : This provider of telecommunication, data, and media communication services in the Nordics, Central and Eastern Europe, and Asia can also be an impressive value investment pick with its Zacks Rank #3 and Value Style Score ‘A’.
International Game Technology PLC (IGT - Free Report) : This global leader in gaming provides technology products and services across lotteries, electronic gaming machines, sports betting, and interactive gaming markets worldwide. The company holds a Zacks Rank #3 and a Value Style Score ‘A’. The company has delivered a trailing four-quarter average positive earnings surprise of 36.7%.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »