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5 Finest PEG Stocks for GARP Investors

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The investing track of the Oracle of Omaha over the past few decades shows a gradual shift from being a pure-play value investor to a GARP (growth at a reasonable price) investor. The logic behind this is the effectiveness of a mixed investment strategy over pure play, value or growth approaches of investments.

Several stocks, which have surged significantly in the recent past, show an overwhelming success of this hybrid investing strategy over pure-play value and growth investments. Here we will discuss the success of five such stocks. These include AutoNation (AN - Free Report) , AMN Healthcare Services (AMN - Free Report) , Olin Corporation (OLN - Free Report) , Franchise Group (FRG - Free Report) and Harley-Davidson (HOG - Free Report) .

A Few More Words on GARP

A pure-play value investor misses the chance of betting on stocks that have bright long-term prospects. In 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 approach. What GARPers look for is whether the stocks are somewhat undervalued and have solid sustainable growth potential (Investopedia).

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 that indicates both undervaluation and future growth potential.

Unfortunately, this ratio is often neglected due to investors' limitations 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 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 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.) You can see the complete list of today's Zacks #1 Rank stocks here.

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 the five of the 35 stocks that qualified the screening:

AutoNation: AutoNation 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, AutoNation arranges financing for vehicle purchases through third-party sources.

A diversified product mix and multiple streams of income reduce the risk profile and bode well for the top and bottom-line growth of AutoNation. Its strong footprint, large dealer network and store expansion efforts are set to drive profitability. AutoNation is an impressive value investment pick with its Zacks Rank #1 and a Value Score of A. Apart from a discounted PEG and P/E, AutoNation also has an impressive long-term expected growth rate of 19.5%.

AMN Healthcare: Headquartered in San Diego, CA, AMN Healthcare Services is a travel healthcare staffing company. It recruits and places nurses, physicians, and other healthcare professionals in travel or permanent assignments in acute-care facilities, physician practice groups, and other healthcare facilities.

Increased healthcare utilization and a tight labor market have created record-high demand in many areas of AMN Healthcare’s business, which is encouraging. Its collaborations, buyouts and innovations are expected to provide greater access to patient care, thereby raising our optimism. AMN Healthcare can also be an impressive value investment pick with its Zacks Rank #1 and a Value Score of B. Apart from a discounted PEG and P/E, the stock has an impressive long-term expected growth rate of 16.2%.

Olin: This is a vertically-integrated global producer and distributor of chemical products and, a U.S. maker of ammunition. Internationally, Olin operates in regions including Latin America, Asia Pacific, and Europe.

Olin’s strategic investment in the information technology project is expected to provide annual cost savings. The project is expected to maximize cost-effectiveness and efficiency. Olin has an impressive long-term expected growth rate of 56%. The stock currently has a Value Score of A and a Zacks Rank #1.

Franchise Group operates as a retailer, franchisor operator, and acquirer of franchised and franchisable businesses. Franchise Group was established to build a world-class franchising platform for an increasingly diverse collection of market-leading and emerging brands that offer exceptional service-based or retail experiences.

The company’s franchising momentum is continuing to accelerate with new development agreements for 153 new locations in addition to 124 new store openings year to date. Apart from a discounted PEG and P/E, Franchise Group has a Value Score of A and holds a Zacks Rank #1.

Harley-Davidson: Milwaukee, WI-based Harley-Davidson is the parent entity of company groups doing business as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services (HDFS).

Harley-Davidson's new operating model and organizational structure have improved effectiveness across all functions. The company's decision to evolve its original LiveWire motorcycle into a dedicated electric vehicle brand is set to bolster prospects. Harley-Davidson has an impressive long-term expected growth rate of 46.3%. 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.

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.

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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.

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