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5 Finest Value Stocks to Buy Now Based on Discounted PEG
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Thanks to the two-year-long pandemic-driven market selloffs and the back-to-back emergence of new variants of COVID-19 increasing uncertainties about the global financial outlook, there are a number of growth stocks that have moved into the undervalued territory. However, thanks to the ongoing opening up of economies across the majority of the nations on gradual easing of the fear factor surrounding the pandemic, market watchers believe that a steep rebound is in the cards for these beaten-down stocks anytime soon.
At this point, with many fundamentally great stocks now at their lows, investors are searching for a suitable investment option. They may currently resort to value investment to capitalize on the long-term potential of these stocks. Here we will discuss the success of five such stocks. These include Westlake Corp. (WLK), Marathon Petroleum (MPC - Free Report) , Huntsman Corporation (HUN - Free Report) , AutoNation (AN - Free Report) and Avnet, Inc. (AVT - Free Report) .
A Peek into Value Investing
While searching for a suitable investment option, value investors with a varied risk appetite are unlikely to consider the price/earnings to growth (PEG) ratio among a number of 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 the future earnings growth potential of a stock. Yardsticks, such as dividend yield, P/E or P/B, are most commonly used to single out stocks trading at a discount.
However, these ratios, which do not take into account the future growth potential of a stock, 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 though. 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 23 stocks that qualified the screening:
Westlake Corporation: Houston, TX-based Westlake Corporation is a global producer and supplier of materials and innovative products. Westlake's range of products includes ethylene, polyethylene, styrene, vinyl intermediates, PVC, PVC Pipe, PVC windows, fence and decking components.
Marathon Petroleum: Findlay, OH-based Marathon Petroleum Corporation is a leading independent refiner, transporter and marketer of petroleum products. Marathon Petroleum operates in two segments: Refining and Marketing and Pipeline Transportation.
Apart from a discounted PEG and P/E, Marathon Petroleum has a Value Score of A and holds a Zacks Rank #2. The company also has an impressive long-term expected growth rate of 18.5%.
Huntsman: Woodlands, TX-based Huntsman is among the world's largest manufacturers of differentiated and commodity chemical products. Huntsman markets its products to a diverse group of industrial and consumer customers. Its products include MDI, polyols, propylene oxide, amines, surfactants, maleic anhydride, epoxy-based polymer formulations, textile chemicals and dyes.
Apart from a discounted PEG and P/E, Huntsman holds a Zacks Rank #1 and has a Value Score of A.
AutoNation: Incorporated in Delaware in 1991, 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, it arranges financing for vehicle purchases through third-party sources.
AutoNation currently holds a Zacks Rank #1 and has a Value Score of A. The company also has an impressive historical five-year growth rate of 34.8%.
Avnet: Based in Phoenix, AZ, Avnet is one of the world’s largest distributors of electronic components and computer products. The company’s customer base includes original equipment manufacturers (OEMs), electronic manufacturing services (EMS) providers, original design manufacturers (ODMs) and value-added resellers (VARs).
Avnet holds a Zacks Rank #1 and has a Value Score of B. The stock also has an impressive long-term expected earnings growth rate of 37.2%.
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.
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.
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 Finest Value Stocks to Buy Now Based on Discounted PEG
Thanks to the two-year-long pandemic-driven market selloffs and the back-to-back emergence of new variants of COVID-19 increasing uncertainties about the global financial outlook, there are a number of growth stocks that have moved into the undervalued territory. However, thanks to the ongoing opening up of economies across the majority of the nations on gradual easing of the fear factor surrounding the pandemic, market watchers believe that a steep rebound is in the cards for these beaten-down stocks anytime soon.
At this point, with many fundamentally great stocks now at their lows, investors are searching for a suitable investment option. They may currently resort to value investment to capitalize on the long-term potential of these stocks. Here we will discuss the success of five such stocks. These include Westlake Corp. (WLK), Marathon Petroleum (MPC - Free Report) , Huntsman Corporation (HUN - Free Report) , AutoNation (AN - Free Report) and Avnet, Inc. (AVT - Free Report) .
A Peek into Value Investing
While searching for a suitable investment option, value investors with a varied risk appetite are unlikely to consider the price/earnings to growth (PEG) ratio among a number of 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 the future earnings growth potential of a stock. Yardsticks, such as dividend yield, P/E or P/B, are most commonly used to single out stocks trading at a discount.
However, these ratios, which do not take into account the future growth potential of a stock, 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 though. 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 23 stocks that qualified the screening:
Westlake Corporation: Houston, TX-based Westlake Corporation is a global producer and supplier of materials and innovative products. Westlake's range of products includes ethylene, polyethylene, styrene, vinyl intermediates, PVC, PVC Pipe, PVC windows, fence and decking components.
Westlake Corporation has an impressive long-term expected growth rate of 31.9%. The stock carries a Zacks Rank #1 and has a Value Score of B. You can see the complete list of today’s Zacks #1 Rank stocks here.
Marathon Petroleum: Findlay, OH-based Marathon Petroleum Corporation is a leading independent refiner, transporter and marketer of petroleum products. Marathon Petroleum operates in two segments: Refining and Marketing and Pipeline Transportation.
Apart from a discounted PEG and P/E, Marathon Petroleum has a Value Score of A and holds a Zacks Rank #2. The company also has an impressive long-term expected growth rate of 18.5%.
Huntsman: Woodlands, TX-based Huntsman is among the world's largest manufacturers of differentiated and commodity chemical products. Huntsman markets its products to a diverse group of industrial and consumer customers. Its products include MDI, polyols, propylene oxide, amines, surfactants, maleic anhydride, epoxy-based polymer formulations, textile chemicals and dyes.
Apart from a discounted PEG and P/E, Huntsman holds a Zacks Rank #1 and has a Value Score of A.
AutoNation: Incorporated in Delaware in 1991, 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, it arranges financing for vehicle purchases through third-party sources.
AutoNation currently holds a Zacks Rank #1 and has a Value Score of A. The company also has an impressive historical five-year growth rate of 34.8%.
Avnet: Based in Phoenix, AZ, Avnet is one of the world’s largest distributors of electronic components and computer products. The company’s customer base includes original equipment manufacturers (OEMs), electronic manufacturing services (EMS) providers, original design manufacturers (ODMs) and value-added resellers (VARs).
Avnet holds a Zacks Rank #1 and has a Value Score of B. The stock also has an impressive long-term expected earnings growth rate of 37.2%.
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.
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