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
TotalEnergies ( TTE Quick Quote TTE - Free Report) , APA Corporation ( APA Quick Quote APA - Free Report) , Telefonica, S.A. ( TEF Quick Quote TEF - Free Report) , The Mosaic Company ( MOS Quick Quote MOS - Free Report) and Dow Inc. ( DOW Quick Quote DOW - Free Report) . A Few More Words on GARP
The GARP theory enables the strategic mingling of growth and value-investing principles, which gives us a hybrid strategy by utilizing the best features of both. What GARPers look for is whether or not the stocks are somewhat undervalued and have solid sustainable growth potential (
GARP investing gives priority to one of the popular value metrics — the price/earnings growth (PEG) ratio. 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 stocks’ P/E ratio with their future earnings growth rates.
While P/E alone gives an idea of stocks that are trading at a discount, PEG, while adding the growth element to it, helps identify stocks with 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 indicating 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 very high growth rate, followed by a sustainable but lower growth rate over the long term.
Hence, PEG-based investing can 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 five out of the 16 stocks that qualified the screening:
TotalEnergies 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.The company’s operations are divided into four main segments: Exploration & Production, Renewables & Power, Refining and Chemicals, and Marketing & Services, which deal with the supply and sale of petroleum products.
TotalEnergies can be an impressive value investment pick with its Zacks Rank #1 and a Value Score of A. Apart from a discounted PEG and P/E, the TotalEnergies stock also has an impressive long-term historical growth rate of 10.7%.
APA Corporation is one of the world's leading independent energy companies engaged in the exploration, development and production of natural gas, crude oil and natural gas liquids. Geographically, the company’s operations are in the United States, Egypt and the North Sea of the United Kingdom. APA also holds acreage offshore Suriname (South America) and at other international locations.
APA can also be an impressive value investment pick with its Zacks Rank #2 and a Value Score of A. Apart from a discounted PEG and P/E, the APA stock also has a solid long-term expected growth rate of 47.3%.
Based in Madrid, Spain,
Telefonica, S.A. provides mobile and fixed communication services in Europe and Latin America. In the recent years, Telefonica has invested heavily in the deployment and transformation of its network to provide excellent connectivity in terms of capacity, speed, coverage and security. The business operations are classified according to the following segments.
Apart from a discounted PEG and P/E, Telefonica has a Value Score of A and holds a Zacks Rank #2. You can see
the complete list of today’s Zacks #1 Rank stocks here.
The Mosaic Company is a leading producer and marketer of concentrated phosphate and potash for the global agriculture industry. It was formed through the combination of the fertilizer businesses of agribusiness giant Cargill Incorporated and IMC Global Inc. Mosaic is the biggest integrated phosphate producer globally and is also among the four largest potash producers in the world. The company caters to customers across roughly 40 countries.
The Mosaic Company has an impressive long-term historical growth rate of 24.7%. The stock currently has a Value Score of B and carries a Zacks Rank #1.
Dow is a material science company, providing a world-class portfolio of advanced, sustainable and leading-edge products. Dow offers a vast range of differentiated products and solutions across high-growth market segments such as packaging, infrastructure and consumer care. Its ethylene plant in Freeport, TX, having a total capacity of 2,000 kilotons per year, is the largest ethylene cracker on the planet.
Dow carries a Zacks Rank of 1 and has a Value Score of B. The company has an impressive long-term expected growth rate of 29.9%.
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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 .
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