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5 Discounted PEG Stocks that Value Investors Can Bet On
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An investor who has just started out often seeks the simplest method to gain amid stock market volatility. This is quite a common practice as they often find it challenging to pick the right stocks for their portfolio due to constantly changing market dynamics.
In the hunt for a winning strategy, they often end up picking the simplest form of value investing - the method of price-to-earnings ratio (P/E). More specifically, a P/E ratio of a stock can decide whether it is currently overvalued or discounted compared with the P/E of the market or peer group. If a stock’s P/E is higher than that of the market, one can conclude that it is an expensive bid and vice versa.
However, the problem arises when a stock apparently with an attractively lower P/E lacks growth catalysts. In such a case, if you buy the stock driven solely by its cheaper P/E, you might still end up paying more on the risk that the stock may falter soon. To avoid such value traps, Warren Buffett advises investors to focus on the earnings growth potential of a stock while judging the intrinsic value. Here lies 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 low PEG ratio is always better for value investors.
While P/E alone fails to identify a true value stock, PEG helps to find 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 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 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), 2 (Buy), 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 (Strong Buy) or 2 (Buy) offer the best upside potential.
Here are five of the 13 stocks that qualified the screening:
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 31% for the next fiscal.
Target Corporation (TGT - Free Report) : Headquartered in Minneapolis, MN, Target operates as a general merchandise retailer in the U.S. Target's initiatives, including the development of omni-channel capacities, diversification and localization of assortments along with emphasis on flexible format stores, bode well. This company has a Value Style Score 'A' and an impressive growth rate of 11.2% for the current fiscal. The stock carries a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here.
Applied Materials, Inc. (AMAT - Free Report) : This company is a provider of manufacturing equipment, services, and software to the semiconductor, display, solar photovoltaic (PV), and related industries worldwide. The company sports a Zacks Rank #1 and a Value Style Score 'B'. It also has an impressive growth rate of 37.4% for the current fiscal.
Tailored Brands, Inc. : This is a men’s specialty apparel retailer in the U.S. and Canada. The brands include Men's Wearhouse, Jos. A. Bank, Joseph Abboud, Moores Clothing for Men and K&G Fashion Superstores. The stock can also be an impressive value investment pick with its Zacks Rank #2 and Value Style Score 'B'. Apart from a discounted PEG and P/E, the stock also has an impressive expected growth rate of 14.1% for the next fiscal.
Grupo Supervielle S.A. (SUPV - Free Report) : This Buenos Aires, Argentina based universal financial services group owns the fifth largest private domestically-owned bank in terms of assets. Supervielle offers retail and corporate banking, treasury, consumer finance, insurance, asset management and other products and services nationwide to a broad customer base. The company holds a Zacks Rank #3 and has a Value Style Score 'B'. The stock also has an impressive long-term earnings growth rate of 25.5%.
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.
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 Discounted PEG Stocks that Value Investors Can Bet On
An investor who has just started out often seeks the simplest method to gain amid stock market volatility. This is quite a common practice as they often find it challenging to pick the right stocks for their portfolio due to constantly changing market dynamics.
In the hunt for a winning strategy, they often end up picking the simplest form of value investing - the method of price-to-earnings ratio (P/E). More specifically, a P/E ratio of a stock can decide whether it is currently overvalued or discounted compared with the P/E of the market or peer group. If a stock’s P/E is higher than that of the market, one can conclude that it is an expensive bid and vice versa.
However, the problem arises when a stock apparently with an attractively lower P/E lacks growth catalysts. In such a case, if you buy the stock driven solely by its cheaper P/E, you might still end up paying more on the risk that the stock may falter soon. To avoid such value traps, Warren Buffett advises investors to focus on the earnings growth potential of a stock while judging the intrinsic value. Here lies 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 low PEG ratio is always better for value investors.
While P/E alone fails to identify a true value stock, PEG helps to find 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 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 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), 2 (Buy), 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 (Strong Buy) or 2 (Buy) offer the best upside potential.
Here are five of the 13 stocks that qualified the screening:
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 31% for the next fiscal.
Target Corporation (TGT - Free Report) : Headquartered in Minneapolis, MN, Target operates as a general merchandise retailer in the U.S. Target's initiatives, including the development of omni-channel capacities, diversification and localization of assortments along with emphasis on flexible format stores, bode well. This company has a Value Style Score 'A' and an impressive growth rate of 11.2% for the current fiscal. The stock carries a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here.
Applied Materials, Inc. (AMAT - Free Report) : This company is a provider of manufacturing equipment, services, and software to the semiconductor, display, solar photovoltaic (PV), and related industries worldwide. The company sports a Zacks Rank #1 and a Value Style Score 'B'. It also has an impressive growth rate of 37.4% for the current fiscal.
Tailored Brands, Inc. : This is a men’s specialty apparel retailer in the U.S. and Canada. The brands include Men's Wearhouse, Jos. A. Bank, Joseph Abboud, Moores Clothing for Men and K&G Fashion Superstores. The stock can also be an impressive value investment pick with its Zacks Rank #2 and Value Style Score 'B'. Apart from a discounted PEG and P/E, the stock also has an impressive expected growth rate of 14.1% for the next fiscal.
Grupo Supervielle S.A. (SUPV - Free Report) : This Buenos Aires, Argentina based universal financial services group owns the fifth largest private domestically-owned bank in terms of assets. Supervielle offers retail and corporate banking, treasury, consumer finance, insurance, asset management and other products and services nationwide to a broad customer base. The company holds a Zacks Rank #3 and has a Value Style Score 'B'. The stock also has an impressive long-term earnings growth rate of 25.5%.
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.
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 »