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 —
Dow Inc. ( DOW Quick Quote DOW - Free Report) , Flex Ltd. ( FLEX Quick Quote FLEX - Free Report) , Petroleo Brasileiro ( PBR Quick Quote PBR - Free Report) , Teck Resources Ltd ( TECK Quick Quote TECK - Free Report) and TotalEnergies SE ( TTE Quick Quote TTE - 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 the five out of the 14 stocks that qualified the screening:
Dow: Dow 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.
Dow has a long-term expected growth rate of 29.9%. Dow 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 . Flex: Singapore-based Flex (formerly known as Flextronics International Ltd) is a provider of “Sketch-to-Scale” services to original equipment manufacturers (OEMs). Flex provides end-to-end services i.e., designing, engineering, manufacturing, as well as supply chain services & solutions.
Flex currently holds a Zacks Rank #2 and has a Value Score of A. Flex also has an impressive five-year expected growth rate of 14.9%.
Petroleo Brasileiro: Headquartered in Rio de Janeiro, Petroleo Brasileiro S.A., or Petrobras S.A., is the largest integrated energy firm in Brazil and one of the largest in Latin America. Petrobras S.A.’s activities include exploration, and production of oil from reservoir wells, shale and other rocks, as well as refining, processing, trading and transportation of oil and oil products, natural gas and other fluid hydrocarbons, in addition to other energy-related activities.
Apart from a discounted PEG and P/E, Petrobras S.A. currently sports a Zacks Rank #1 and has a Value Score of B. PBR has a long-term historical growth rate of 40.2%.
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 A and carries a Zacks Rank of 2.
TotalEnergies SE: France-based TotalEnergies SE is among the top five publicly traded global integrated oil and gas companies based on production volumes, proved reserves and market capitalization. The company has operations in more than 130 countries across five continents.
TotalEnergies SE currently holds a Zacks Rank #1 and has a Value Score of A. It also has an impressive five-year expected growth rate of 10.7%.
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