With smart investment becoming the buzzword in today’s investment world, millennials are more inclined toward hybrid investment patterns rather than traditional pure play theories like value or growth.
The logic behind this is the effectiveness of a mixed investment strategy as value or growth investing approaches come with their own share of pitfalls. A pure play value investor misses the chance of betting on stocks that have bright long-term prospects. The same way, growth investors often end up investing in expensive stocks. In other words, to make a long-term investment more effective, the principles of both value and growth strategies need to be combined.
The quest for a mixed investment strategy led to the introduction of the GARP (growth at a reasonable price) approach. What GARPers look for is whether the stocks are somewhat undervalued and have solid sustainable growth potential (
One of the fundamental metrics for finding GARP is the price/earnings growth ratio (PEG). 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 a stock’s 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 to it, helps to find those stocks that have solid future potential.
A lower PEG ratio, preferably less than 1, is always better for GARP investors.
Say for example, if a stock's P/E ratio is 10 and the expected long-term growth rate is 15%, the company's PEG will come down to 0.66, a ratio which indicates both undervaluation and future growth potential.
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 does not consider the very common situation of changing growth rates such as the forecast of the first three years at 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 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 seven of the 43 stocks that qualified the screening:
GIII Apparel Group, LTD. ( GIII Quick Quote GIII - Free Report) : This is a manufacturer, designer and distributor of apparel and accessories under licensed brands, owned brands and private label brands. The company has a portfolio of more than 30 licensed and proprietary brands, including five global major brands — DKNY, Donna Karan, Calvin Klein, Tommy Hilfiger and Karl Lagerfeld. The stock can be an impressive value investment pick with its Zacks Rank #1 and Value Score of A. Apart from a discounted PEG and P/E, the stock also has an impressive long-term expected growth rate of 11.6%. You can see the complete list of today's Zacks #1 Rank stocks here . Rocket Companies, Inc. ( RKT Quick Quote RKT - Free Report) : The company is engaged in the tech-driven real estate, mortgage, and e-commerce businesses in the United States and Canada with two operating segments, Direct to Consumer and Partner Network. Its solutions include Rocket Mortgage, Amrock, Rocket Homes, Rocket Auto and Rocket Loans. The stock can also be an impressive value investment pick with its Zacks Rank #1 and Value Score of A. Apart from a discounted PEG and P/E, the stock also has an impressive long-term expected growth rate of 8.7%. Boise Cascade, L.L.C. ( BCC Quick Quote BCC - Free Report) is one of the largest producers of engineered wood products and plywood in North America and a leading U.S. wholesale distributor of building products. The company has an impressive long-term growth rate of 8.8%. The stock currently has a Value Score of A and a Zacks Rank #1. Select Medical Holdings Corporation ( SEM Quick Quote SEM - Free Report) : This U.S.-based healthcare company owns long- term acute care and inpatient rehabilitation hospitals, as well as occupational health and physical therapy clinics. Apart from a discounted PEG and P/E, the stock has a Value Score of A and holds a Zacks Rank #1. The Mosaic Company ( MOS Quick Quote MOS - Free Report) : This is a leading producer and marketer of concentrated phosphate and potash for the global agriculture industry. Mosaic is the biggest integrated phosphate producer globally and is also among the four largest potash producers in the world. The stock carries a Zacks Rank #1 and has a Value Score of B. Synchrony Financial ( SYF Quick Quote SYF - Free Report) is a premier consumer financial services company offering a wide range of credit products through a diverse group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and health and wellness providers. The stock can also be an impressive value investment pick with its Zacks Rank #2 and Value Score of A. Apart from a discounted PEG and P/E, the stock also has an impressive long-term expected growth rate of 21.3%. Camping World Holdings Inc. ( CWH Quick Quote CWH - Free Report) is arecreational vehicle and outdoor retailer, offering an extensive range of recreational vehicles for sale, RV and camping gear, RV maintenance and repair, other outdoor and active sports products. The company has an impressive long-term growth rate of 34.7%. The stock currently has a Value Score of A and a Zacks Rank #1.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
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