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Thanks to the one-and-a-half year long pandemic-driven market selloffs, a number of growth stocks moved into the undervalued territory. However, with the ongoing extensive rollout of vaccines across nations as well as the COVID-19 fear factor gradually easing out of the economy, market watchers believe that steep rebounds are in the cards for these beaten-down stocks anytime in 2021.
At this point of time, with many fundamentally great stocks now at their lows, 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 this 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 56 stocks that qualified the screening:
AutoNation, Inc. (AN - Free Report) : This is the largest automotive retailer in the United States. The company offers vehicle maintenance and repair services, vehicle parts, extended service contracts, vehicle protection products, and other aftermarket products. In addition, it arranges financing for vehicle purchases through third-party sources. The company has an impressive long-term expected growth rate of 20%. 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.
Hibbett Sports, Inc. (HIBB - Free Report) : This is a major athletic-inspired retailer, located in small and mid-sized markets across the country. The company operates predominantly in the South, Southwest, Mid-Atlantic and Midwest regions of the United States. Apart from a discounted PEG and P/E, the stock has a Value Score of A and holds a Zacks Rank #1. The company also has an impressive long-term historical growth rate of 16.4%.
American Axle (AXL - Free Report) : This is a leading supplier of driveline and drivetrain systems, modules and components for the light vehicle market. The company supplies driveline systems and other components to various auto biggies including General Motors, Jaguar Land Rover, Ford, Harley-Davidson, Volkswagen, Nissan, Honda, Daimler and Stellantis. Apart from a discounted PEG and P/E, the stock holds a Zacks Rank #2 and has a Value Score of A.
Dow Inc (DOW - Free Report) : This is a material science company, providing a world-class portfolio of advanced, sustainable and leading-edge products. Dow’s broad portfolio of higher-value functional polymers, significant low-cost global feedstock positions, global footprint and market reach and manufacturing sites in every geographic region place it in an advantageous position against competitors. The company currently holds a Zacks Rank #1 and has a Value Score of B. The company also has an impressive expected five-year growth rate of 27.7%.
Berry Global Group, Inc. (BERY - Free Report) : The company manufactures and distributes nonwoven specialty materials, engineered materials and consumer packaging products in the market. The company services personal care, healthcare as well as beverage and food markets in South America, North America, Asia and Europe. The stock holds a Zacks Rank #2 and has a Value Score of A. The stock also has an impressive long-term historical earnings growth rate of 20.9%.
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.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
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5 Value Stocks Based on Discounted PEG to Buy Now
Thanks to the one-and-a-half year long pandemic-driven market selloffs, a number of growth stocks moved into the undervalued territory. However, with the ongoing extensive rollout of vaccines across nations as well as the COVID-19 fear factor gradually easing out of the economy, market watchers believe that steep rebounds are in the cards for these beaten-down stocks anytime in 2021.
At this point of time, with many fundamentally great stocks now at their lows, 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 this 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 56 stocks that qualified the screening:
AutoNation, Inc. (AN - Free Report) : This is the largest automotive retailer in the United States. The company offers vehicle maintenance and repair services, vehicle parts, extended service contracts, vehicle protection products, and other aftermarket products. In addition, it arranges financing for vehicle purchases through third-party sources. The company has an impressive long-term expected growth rate of 20%. 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.
Hibbett Sports, Inc. (HIBB - Free Report) : This is a major athletic-inspired retailer, located in small and mid-sized markets across the country. The company operates predominantly in the South, Southwest, Mid-Atlantic and Midwest regions of the United States. Apart from a discounted PEG and P/E, the stock has a Value Score of A and holds a Zacks Rank #1. The company also has an impressive long-term historical growth rate of 16.4%.
American Axle (AXL - Free Report) : This is a leading supplier of driveline and drivetrain systems, modules and components for the light vehicle market. The company supplies driveline systems and other components to various auto biggies including General Motors, Jaguar Land Rover, Ford, Harley-Davidson, Volkswagen, Nissan, Honda, Daimler and Stellantis. Apart from a discounted PEG and P/E, the stock holds a Zacks Rank #2 and has a Value Score of A.
Dow Inc (DOW - Free Report) : This is a material science company, providing a world-class portfolio of advanced, sustainable and leading-edge products. Dow’s broad portfolio of higher-value functional polymers, significant low-cost global feedstock positions, global footprint and market reach and manufacturing sites in every geographic region place it in an advantageous position against competitors. The company currently holds a Zacks Rank #1 and has a Value Score of B. The company also has an impressive expected five-year growth rate of 27.7%.
Berry Global Group, Inc. (BERY - Free Report) : The company manufactures and distributes nonwoven specialty materials, engineered materials and consumer packaging products in the market. The company services personal care, healthcare as well as beverage and food markets in South America, North America, Asia and Europe. The stock holds a Zacks Rank #2 and has a Value Score of A. The stock also has an impressive long-term historical earnings growth rate of 20.9%.
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.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report