In a market dealing with external shocks, value investing is fast gaining popularity. The success of value investors like Warren Buffett underscores this. Buffett and his business partner, Charlie Munger, managed to register a 20.1% CAGR for Berkshire Hathaway from 1965 through 2021. This favorably compares with a 10.5% rise of the S&P 500 index during the same period.

Several other stocks, which have surged significantly in the recent past, have shown the overwhelming success of this pure-play investment strategy. Here we discuss five such stocks -- AutoNation, Inc. (AN Quick QuoteAN - Free Report) , Asbury Automotive Group, Inc. (ABG Quick QuoteABG - Free Report) , AMN Healthcare Services (AMN Quick QuoteAMN - Free Report) , Teck Resources Ltd (TECK Quick QuoteTECK - Free Report) and AGCO Corporation (AGCO Quick QuoteAGCO - Free Report) .

More on Value Investing

While searching for a suitable investment option, value investors with a varied risk appetite are unlikely to consider price/earnings to growth (PEG) ratio among several other popular 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 a stock's future earnings growth potential. Yardsticks, such as dividend yield, P/E or P/B, are commonly used to single out stocks trading at a discount.

However, while not taking into account the growth potential of a stock, these ratios might end up convincing us to invest in stocks that are at a discount just because of their poor show. This might often lead to “value traps” — a situation when these value picks start to underperform over the long run as the temporary problems, which once pulled down the share price, turn out to be persistent.

In such a case, even if you buy a stock at less than its fair value, you might still end up paying more. And here comes the importance of this not-so-popular but crucial value investing metric, the PEG ratio.

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 find the intrinsic value of a stock.

There are some drawbacks to using the PEG ratio. It doesn’t 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 over 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 out of the 25 stocks that qualified the screening:

AutoNation: AutoNation is the largest automotive retailer in the United States. AutoNation offers vehicle maintenance and repair services, vehicle parts, extended service contracts, vehicle protection products, and other aftermarket products. In addition, AN arranges financing for vehicle purchases through third-party sources.

AutoNation has a long-term historical growth rate of 34.8%. AN currently carries a Zacks Rank of 1 and has a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

Asbury: Headquartered in Duluth, GA, Asbury is one of the leading automotive retailers in the United States. Asbury’s latest five-year plan focuses on the increase in revenues and profitability strategically through organic and acquisitive growth as well as their Clicklane digital vehicle purchasing platform.

Asbury currently holds a Zacks Rank #1 and has a Value Score of A. ABG also has an impressive five-year historical growth rate of 34.5%.

AMN Healthcare Services:  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.

Apart from a discounted PEG and P/E, AMN currently sports a Zacks Rank #1 and has a Value Score of B. AMN Healthcare has a long-term historical growth rate of 28.8%.

Teck Resources: Vancouver, Canada-based Teck Resources is a diversified resource company committed to mining and mineral development with business units focused on steelmaking coal, copper, zinc and energy. Teck Resources' principal products include steelmaking coal; copper concentrates and refined copper cathodes; refined zinc and zinc concentrates; energy products, such as bitumen; and lead concentrates.

Teck Resources has an impressive long-term expected growth rate of 38.7%. TECK stock currently has a Value Score of B and carries a Zacks Rank of 1.

AGCO Corporation: Headquartered in Duluth, GA, AGCO is a leading manufacturer and distributor of agricultural equipment and related replacement parts. AGCO offers a full product line of farm equipment through a wide network of dealers and distributors across 140 countries.

AGCO currently holds a Zacks Rank #2 and has a Value Score of A. It also has an impressive five-year historical growth rate of 28.4%.

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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.

Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.

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