In a market hurt by external shocks, equity investments need to be properly hedged. A question that arises frequently is whether one should resort to a value strategy that seeks discounted stocks or opt for growth investing in times of extreme market instability.
The investing track of the Oracle of Omaha over the past few decades and his gradual shift from being a pure-play value investor to a GARP (growth at a reasonable price) investor might give us all the answers.
In this regard, we should take note that strategic mingling of both growth and value investing principles gives us a mixed investing strategy that is getting popular with each passing day. What GARPers look for is whether the stocks are somewhat undervalued and have solid sustainable growth potential (
And here comes the importance of a not-so-popular fundamental metric, the price/earnings growth (PEG) ratio. Although it is categorized under value investing, this strategy follows the principles of both growth and value investing.
The PEG ratio is defined as (Price/ Earnings)/Earnings Growth Rate
It relates the stocks’ P/E ratio with future earnings growth rate.
While P/E alone only gives the idea of stocks, which are trading at a discount, PEG while adding the GROWTH element in it, helps find those stocks that have solid future potential.
A lower PEG ratio is always better for investors.
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 rates 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 74 stocks that qualified the screening:
Nexstar Media Group ( NXST Quick Quote NXST - Free Report) is a diversified media company that leverages localism to bring new services and value to consumers and advertisers through its traditional media, digital and mobile media platforms. Its wholly owned operating subsidiary, Nexstar Inc., consists of three divisions: Broadcasting, Digital, and Networks. The stock can be an impressive value investment pick with its Zacks Rank #2 and a Value Score of A. Apart from a discounted PEG and P/E, the stock has an impressive long-term historical growth rate of 39.8%. You can see the complete list of today’s Zacks #1 Rank stocks here . Select Medical Holdings Corporation ( SEM Quick Quote SEM - Free Report) is a U.S.-based healthcare company that owns long-term acute care and inpatient rehabilitation hospitals, as well as occupational health and physical therapy clinics. The stock can also be an impressive value investment pick with its Zacks Rank #1 and a Value Score of A. Apart from a discounted PEG and P/E, the stock also has an impressive long-term historical growth rate of 17.4%. Affiliated Managers Group, Inc. ( AMG Quick Quote AMG - Free Report) is a global asset manager with equity investments in a large group of investment management firms or affiliates. The company operates its business through three principal distribution channels which are Institutional, Retail and High Net Worth. The company has an impressive long-term expected growth rate of 11.6%. The stock currently has a Value Score of A and carries a Zacks Rank of 1. FedEx Corporation ( FDX Quick Quote FDX - Free Report) is a leading player in global express delivery services space. The company provides a broad portfolio of transportation, e-commerce and business services through companies competing collectively, operating independently and managed collaboratively, under the FedEx brand. Apart from a discounted PEG and P/E, the stock has a Value Score of A and holds a Zacks Rank #2, at present. The company has an impressive long-term expected growth rate of 12%. Invesco Ltd. ( IVZ Quick Quote IVZ - Free Report) operates as an independent investment manager and offers a wide range of investment products and services. With the support of a global operating platform, Invesco distributes a broad range of investment products and services. Currently, the stock carries a Zacks Rank #1 and has a Value Score of B. The company has an impressive long-term expected growth rate of 11.3%.
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Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance .