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With the market becoming more and more vulnerable to external shocks, investors are keen on finding out an investment strategy that judges the inner potential of a stock. Needless to mention, value investment is gaining popularity with each passing day. Though apparently simple, this investing discipline has resulted in dangerous outcomes a number of times due to investors’ oversight of the basics.
Warren Buffett, the popular value investor, believes that proper understanding of the “intrinsic value” of a stock may ease out many problems in this respect. According to him, going by the fundamentals of value investing, while picking undervalued stocks, we need to focus on their earnings growth potential.
While yardsticks such as dividend yield, the ratio of price to earnings, to sales or to book value are the most common value investing matrices, which can easily single out stocks trading at a discount, these ratios fail to consider the future potential of a stock. PEG is a ratio that has 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 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) 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 11 stocks that qualified the screening:
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 be an impressive value investment pick with its Zacks Rank #1 and Value Style Score 'A'. Apart from a discounted PEG and P/E, the stock also has an impressive long-term expected growth rate of 16.5%.
CAI International, Inc. : This is a transportation finance and logistics company. The stock currently holds a Zacks Rank #1 and has a Value Style score ‘A’. The company also has an impressive growth rate of 306.5% for the current fiscal. You can see the complete list of today’s Zacks #1 Rank stocks here.
Nobilis Health Corp. (HLTH - Free Report) : This full-service healthcare development and management company can also be an impressive value investment pick with its Zacks Rank #1 and Value Style Score ‘A’. The company also has an impressive expected five-year growth rate of 20%.
Walker & Dunlop, Inc. (WD - Free Report) : This commercial real estate services and finance company is a provider of a range of multifamily and other commercial real estate financing products for owners and developers of real estate in the U.S. The company holds a Zacks Rank #1 and a Value Style Score ‘B’. It also has an impressive growth rate of 25.5% for the current fiscal.
West Corporation : This company provides communication and network infrastructure services. The stock has a Zacks Rank #2 and a Value Style Score ‘A’. The company’s five-year expected earnings growth rate is 7.5%.
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:Inaddition 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 Magical Value Picks Based on Discounted PEG
With the market becoming more and more vulnerable to external shocks, investors are keen on finding out an investment strategy that judges the inner potential of a stock. Needless to mention, value investment is gaining popularity with each passing day. Though apparently simple, this investing discipline has resulted in dangerous outcomes a number of times due to investors’ oversight of the basics.
Warren Buffett, the popular value investor, believes that proper understanding of the “intrinsic value” of a stock may ease out many problems in this respect. According to him, going by the fundamentals of value investing, while picking undervalued stocks, we need to focus on their earnings growth potential.
While yardsticks such as dividend yield, the ratio of price to earnings, to sales or to book value are the most common value investing matrices, which can easily single out stocks trading at a discount, these ratios fail to consider the future potential of a stock. PEG is a ratio that has 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 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) 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 11 stocks that qualified the screening:
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 be an impressive value investment pick with its Zacks Rank #1 and Value Style Score 'A'. Apart from a discounted PEG and P/E, the stock also has an impressive long-term expected growth rate of 16.5%.
CAI International, Inc. : This is a transportation finance and logistics company. The stock currently holds a Zacks Rank #1 and has a Value Style score ‘A’. The company also has an impressive growth rate of 306.5% for the current fiscal. You can see the complete list of today’s Zacks #1 Rank stocks here.
Nobilis Health Corp. (HLTH - Free Report) : This full-service healthcare development and management company can also be an impressive value investment pick with its Zacks Rank #1 and Value Style Score ‘A’. The company also has an impressive expected five-year growth rate of 20%.
Walker & Dunlop, Inc. (WD - Free Report) : This commercial real estate services and finance company is a provider of a range of multifamily and other commercial real estate financing products for owners and developers of real estate in the U.S. The company holds a Zacks Rank #1 and a Value Style Score ‘B’. It also has an impressive growth rate of 25.5% for the current fiscal.
West Corporation : This company provides communication and network infrastructure services. The stock has a Zacks Rank #2 and a Value Style Score ‘A’. The company’s five-year expected earnings growth rate is 7.5%.
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:Inaddition 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 »