Year 2021 started with resurgence of pandemic-triggered market sell offs. All the benchmarks reported significant decline on the very first trading day itself, thanks to the more infectious strain of Covid-19. Also, the ongoing lack of clarity related to the effectiveness of the vaccines on this new strain have kept market watchers on tenterhooks.
At this point of time, the big question is which investment strategy can you resort to right now? With many fundamentally great stocks now at their historical lows on a series of production and supply halts worldwide, investors searching for a suitable investment option may currently resort to value investment to capitalize on the long-term potential of these stocks.
However, this apparently simple-to-understand investing discipline has its own share of pitfalls. Value investors, while betting on stocks, often fall prey to companies that have weak prospects. This may often lead to “value traps” — a situation when these value picks start to underperform over the long run as the temporary problems, which once drove the share price down, turn out to be persistent.
And here comes the importance of the not-so-popular but crucial value investing metric, price/earnings to growth (PEG) ratio.
While searching for a suitable value investment option, investors are unlikely to consider this ratio among a number of other popular value metrics like price/earnings (P/E), price/sales (P/S) or price/book value (P/B). This is because they often find this ratio complicated, considering the limitations in calculating the future earnings growth potential of a stock.
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.
There are some drawbacks to using the PEG ratio though. It does not 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) 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 52 stocks that qualified the screening:
The ODP Corporation ( ODP Quick Quote ODP - Free Report) : The company provides business services and supplies, products, and technology solutions for small, medium, and enterprise businesses. It currently operates in three divisions — Business Solutions, Retail, and CompuCom. The company has an impressive long-term historical growth rate of 18.6%. The stock carries a Zacks Rank #1 and has a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here. ArcBest Corporation ( ARCB Quick Quote ARCB - Free Report) : This is a global freight transportation services and integrated logistics solutions company. It operates through three segments namely Asset-Based, ArcBest, and FleetNet. This stock too sports a Zacks Rank #1 and has a Value Score of A. Its long-term historical growth rate is pegged at 15.5%. Federated Hermes, Inc. ( FHI Quick Quote FHI - Free Report) : This company is a leading global investment manager with $614.8 billion in assets under management as of Sep 30, 2020. The company has an impressive long-term historical growth rate of 12.4%. The stock carries a Zacks Rank #2 and has a Value Score of A. FedEx Corporation ( FDX Quick Quote FDX - Free Report) : The company provides customers and businesses worldwide with a broad portfolio of transportation, e-commerce and business services. Apart from a discounted PEG and P/E, the stock has a Value Score of B and holds a Zacks Rank #1. The company also has an impressive long-term expected growth rate of 12%. Jones Lang LaSalle Incorporated ( JLL Quick Quote JLL - Free Report) : This is a leading full-service real estate firm that provides corporate, financial and investment management services to corporations and other real estate owners, users, and investors worldwide. Apart from a discounted PEG and P/E, the stock holds a Zacks Rank #1 and has a Value Score of B.
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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 .
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