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With the vicissitudes rocking the world stock market right from day one of the year, value investing has become the preferred choice among investors of varied risk appetite. If the market reaches its bottom, compelling investors to sell their handful of stocks in a panic, Warren Buffett’s advice is to grab the opportunity and buy bargain stocks at cheap prices.
But what if the market is beaming with health? By this same theory of value investing, will you stop investing? According to Buffet, the ‘intrinsic value’ of a stock will give you all the answers. Yardsticks such as dividend yield, the ratio of price to earnings or to book value are the most common forms of intrinsic value calculation, which can easily single out the stocks, the market is currently undervaluing.
But will this alone ensure success? What if you buy a stock at less than its fair value, and then the stock stops performing? This is not an uncommon case when there is a dearth of catalysts propelling growth even though the stock is trading at a discount.
To avoid such value traps, Buffet has advised investors to keep a focus on the earnings growth potential of a stock. And here comes the importance of a not-so-popular value investing metric, the PEG ratio.
The PEG ratio is defined as: (Price/ Earnings)/ Earnings Growth Rate
A lower PEG ratio is always better for value investors.
While P/E alone fails to identify a true value stock, PEG helps finding the intrinsic value of a stock.
Unfortunately, this ratio is often neglected due to investors’ limitation to calculate the future earnings growth rate 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 followed by a sustainable but lower growth rate in 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 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), 2 (Buy) or 3 (Hold) (whether good market conditions or bad, stocks with a Zacks Rank #1 (Strong Buy), #2 (Buy) and #3 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 or 2 offer the best upside potential.
Here are five of the 12 stocks that qualified the screening:
United Natural Foods, Inc. (UNFI - Free Report) : UNFI, which along with its subsidiaries, serves a wide variety of retail formats in the U.S. holds a Zacks Rank #1 and a Value Style Score ‘B’. The company has delivered an earnings surprise of more than 15.2% in its last reported quarter and is beaming with prospects.
Volkswagen AG : This automobile maker currently carries a Zacks Rank #3 and a Value Style Score ‘A’. The company also has an impressive expected five-year growth rate of 25.2%.
Tallgrass Energy GP, LP : This popular name in the field of midstream energy assets in North America currently holds a Zacks Rank #1 and a Value Style score ‘B’. The company registered an earnings surprise of 300% in its last reported quarter with a trailing 12-month earnings beat of more than 82%.
Plantronics, Inc. : PLT is a global leader in audio communications for businesses and consumers. This Zacks Rank #2 and Value Style Score ‘A’ company also registered an earnings surprise of 20.51% with a trailing four-quarter average beat of 14.89%.
The Liberty Media Group : This entertainment services provider currently carries a Zacks Rank #3 and Value Style Score ‘A’. The company also has an impressive expected five-year growth rate of 35.5%.
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.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »
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5 Best PEG Stocks for Efficient Value Investing
With the vicissitudes rocking the world stock market right from day one of the year, value investing has become the preferred choice among investors of varied risk appetite. If the market reaches its bottom, compelling investors to sell their handful of stocks in a panic, Warren Buffett’s advice is to grab the opportunity and buy bargain stocks at cheap prices.
But what if the market is beaming with health? By this same theory of value investing, will you stop investing? According to Buffet, the ‘intrinsic value’ of a stock will give you all the answers. Yardsticks such as dividend yield, the ratio of price to earnings or to book value are the most common forms of intrinsic value calculation, which can easily single out the stocks, the market is currently undervaluing.
But will this alone ensure success? What if you buy a stock at less than its fair value, and then the stock stops performing? This is not an uncommon case when there is a dearth of catalysts propelling growth even though the stock is trading at a discount.
To avoid such value traps, Buffet has advised investors to keep a focus on the earnings growth potential of a stock. And here comes the importance of a not-so-popular value investing metric, the PEG ratio.
The PEG ratio is defined as: (Price/ Earnings)/ Earnings Growth Rate
A lower PEG ratio is always better for value investors.
While P/E alone fails to identify a true value stock, PEG helps finding the intrinsic value of a stock.
Unfortunately, this ratio is often neglected due to investors’ limitation to calculate the future earnings growth rate 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 followed by a sustainable but lower growth rate in 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 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), 2 (Buy) or 3 (Hold) (whether good market conditions or bad, stocks with a Zacks Rank #1 (Strong Buy), #2 (Buy) and #3 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 or 2 offer the best upside potential.
Here are five of the 12 stocks that qualified the screening:
United Natural Foods, Inc. (UNFI - Free Report) : UNFI, which along with its subsidiaries, serves a wide variety of retail formats in the U.S. holds a Zacks Rank #1 and a Value Style Score ‘B’. The company has delivered an earnings surprise of more than 15.2% in its last reported quarter and is beaming with prospects.
Volkswagen AG : This automobile maker currently carries a Zacks Rank #3 and a Value Style Score ‘A’. The company also has an impressive expected five-year growth rate of 25.2%.
Tallgrass Energy GP, LP : This popular name in the field of midstream energy assets in North America currently holds a Zacks Rank #1 and a Value Style score ‘B’. The company registered an earnings surprise of 300% in its last reported quarter with a trailing 12-month earnings beat of more than 82%.
Plantronics, Inc. : PLT is a global leader in audio communications for businesses and consumers. This Zacks Rank #2 and Value Style Score ‘A’ company also registered an earnings surprise of 20.51% with a trailing four-quarter average beat of 14.89%.
The Liberty Media Group : This entertainment services provider currently carries a Zacks Rank #3 and Value Style Score ‘A’. The company also has an impressive expected five-year growth rate of 35.5%.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »