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-
Pilgrim's Pride ( PPC Quick Quote PPC - Free Report) , Signet Jewelers ( SIG Quick Quote SIG - Free Report) , Greif, Inc. ( GEF Quick Quote GEF - Free Report) , Delek US Holdings ( DK Quick Quote DK - Free Report) and Marathon Petroleum ( MPC Quick Quote MPC - Free Report) . More on 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 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:
Pilgrim's Pride: Pilgrim's Pride is focusing on strengthening its Prepared Foods category. Also, the company has been increasing its product mix for the organic category, including No-Antibiotics-Ever products, to cater to customers' evolving tastes.
Pilgrim's Pride has a long-term expected growth rate of 14.9%. PPC currently carries a Zacks Rank of 2 and has a Value Score of A. You can see
the complete list of today’s Zacks #1 Rank stocks here . Signet Jewelers: Headquartered in Hamilton, Bermuda, Signet Jewelers is a retailer of diamond jewelry, watches as well as other products. The company operates in the United States, Canada, the U.K., the Republic of Ireland, and the Channel Islands. The company is often considered the leading retailer of diamond jewelry.
Signet Jewelers currently holds a Zacks Rank #1 and has a Value Score of A. SIG also has an impressive five-year historical growth rate of 12%.
Greif: Delaware, OH-based Greif is a leading global producer of industrial packaging products and services with manufacturing facilities located in over 40 countries. It offers a comprehensive line of rigid industrial packaging products and containerboard and corrugated products for niche markets in North America. It is also a leading global producer of flexible intermediate bulk containers.
Apart from a discounted PEG and P/E, GEF currently sports a Zacks Rank #1 and has a Value Score of B. Greif has a long-term historical growth rate of 17.1%.
Delek US Holdings: Brentwood, TN-based Delek US Holdings is an independent refiner, transporter and marketer of petroleum products. The company’s operations are organized into three reportable segments: Refining, Logistics and Retail.
Delek US Holdings has an impressive long-term expected growth rate of 22.2%. DK stock currently has a Value Score of B and carries a Zacks Rank of 1.
Marathon Petroleum: Findlay, OH-based Marathon Petroleum is a leading independent refiner, transporter and marketer of petroleum products.Marathon Petroleum currently operates in two segments: Refining and Marketing and Pipeline Transportation.
MPC currently sports a Zacks Rank #1 and has a Value Score of B. It also has an impressive five-year expected growth rate of 20%.
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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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