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5 Dirt Cheap PEG Stocks that Value Investors Love

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The Oracle of Omaha, Warren Buffett‘s success can be solely attributed to value investment. His success story, which started 60 years back, clearly underscores how value investment has helped him to transform less than $10,000 into a net worth of $68.4 billion as of Jun 2016 (per a Motley Fool article).

This once again indicates the importance of value investing as the most tempting strategy to bet on even amid volatile market conditions. Buffett believes that proper understanding of the “intrinsic value” of a stock may ease out many problems with regard to value investment. According to him, going by the fundamentals of value investing while picking undervalued stocks,  investors need to focus on their earnings growth potential.

While yardsticks such as dividend yield, the ratio of price to earnings, sales or book value are the most common value investing matrices that can easily single out stocks trading at a discount, these ratios fail to consider the potential of a stock. PEG is the ratio with the earnings growth component in it.

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 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 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 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) 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 five of the 20 stocks that qualified the screening:

The Chemours Company (CC - Free Report) is a leading player in the field of titanium technologies, fluoroproducts and chemical solutions, catering to a wide range of industries with market-defining products, application expertise and chemistry-based innovations. The company has an impressive expected five-year growth rate of 15.5%. The stock currently has a Value Style Score of ‘B’ and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Unilever PLC (UL - Free Report) is one of the world’s leading suppliers of Food, Home Care, Personal Care and Refreshment products with sales in over 190 countries. Its leading brand in the U.S. and Canada include Axe, Becel, Ben & Jerry’s, Dove, Lipton, Magnum, Nexxus, Noxzema, Pond’s, and Vaseline among many more. The company currently holds a Zacks Rank #1 and has a Value Style score ‘B’. The company also has an impressive expected five-year growth rate of 12%.

Weight Watchers International, Inc. (WTW - Free Report) provides commercial weight management services through a global network of the company-owned and franchise operations and offers innovative, digital weight management products through its websites, mobile sites and apps. The stock can also be an impressive value investment pick with its Zacks Rank #2 and Value Style Score of 'B'. Apart from a discounted PEG and P/E, the stock also has an impressive expected growth rate of 49.5% for the current fiscal.

ArcelorMittal (MT - Free Report) : Based in Luxembourg, ArcelorMittal is the world’s leading steel and mining company. With a presence in more than 60 countries, it operates a balanced portfolio of cost competitive steel plants across both the developed and developing world. It is the leader in all the main sectors – automotive, household appliances, packaging and construction. With a Zacks Rank #1 and a Value Style Score of ‘A’, this stock can prove to be a solid value investment pick at present. The stock has an impressive expected growth rate of 89.6% for the current fiscal.

Boise Cascade Company (BCC - Free Report) is one of the largest producers of engineered wood products and plywood in North America and a U.S. wholesale distributor of building products. Apart from a discounted PEG and P/E, the stock holds a Zacks Rank #1 and a Value Style Score of ‘B’.

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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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