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 more than 20% CAGR for Berkshire Hathaway from 1965 through 2022. This compares favorably with a 10% rise of the S&P 500 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 — Royal Caribbean Cruises (RCL Quick QuoteRCL - Free Report) , DaVita (DVA Quick QuoteDVA - Free Report) , Ford Motor (F Quick QuoteF - Free Report) , Fidelity National Information Services (FIS Quick QuoteFIS - Free Report) and Itron (ITRI Quick QuoteITRI - 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 and 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 nine stocks that qualified the screening:

Royal Caribbean: Based in Miami, Royal Caribbean Cruises owns and operates three global brands — Royal Caribbean International, Celebrity Cruises and Azamara Club Cruises. Additionally, it has a 50% investment in a joint venture with TUI AG, which operates the brand TUI Cruises. The company’s cruise brands primarily serve the contemporary, premium and deluxe segments of the cruise vacation industry, which also includes the budget and luxury segments.

Royal Caribbean currently sports a Zacks Rank #1 and has a Value Score of A. Royal Caribbean also has an impressive five-year expected growth rate of 26.7%. You can see the complete list of today’s Zacks #1 Rank stocks here.

DaVita: Denver, CO-headquartered DaVita is a leading provider of dialysis services in the United States to patients suffering from chronic kidney failure, also known as end-stage renal disease (ESRD). The company operates kidney dialysis centers and provides related medical services, primarily in dialysis centers and in contracted hospitals across the United States. Its services include outpatient dialysis services, hospital inpatient dialysis services and ancillary services such as ESRD laboratory services and disease management services.

Apart from a discounted PEG and P/E, DaVita currently has a Zacks Rank #1 and a Value Score of A. DaVita has a long-term historical growth rate of 15.5%.

Ford Motor: Dearborn, MI-based Ford is one of the leading automakers in the world. It manufactures, markets and services cars, trucks, sport utility vehicles, electrified vehicles and Lincoln luxury vehicles. Ford Blue's core focus lies in the retail sales of Ford and Lincoln vehicles, encompassing both internal combustion engine and hybrid models.

Ford Motor has an impressive long-term historical growth rate of 7.1%. Ford Motor currently has a Value Score of A and a Zacks Rank of 2.

Fidelity: Headquartered in Jacksonville, FL, Fidelity provides banking and payments technology solutions, processing services and information-based services to the financial services industry. FIS’ majority stake divestiture in the Worldpay Merchant Solutions business to private equity funds managed by GTCR was completed in the first quarter of 2024.

Apart from a discounted PEG and P/E, Fidelity currently has a Zacks Rank #2 and a Value Score of B. Fidelity has a long-term expected growth rate of 17%.

Itron: Headquartered in Liberty Lake, WA, Itron is a technology and services company and one of the leading global suppliers of a wide range of standard, advanced, and smart meters and meter communication systems, including networks and communication modules, software, devices, sensors, data analytics and services to the utility and municipal sectors.Itron solutions (technology, software, and services) are delivered to users as part of a standalone, one-time purchase or end-to-end solution over multiple years.

Apart from a discounted PEG and P/E, Itron currently has a Zacks Rank #2 and a Value Score of B. Itron has a long-term expected growth rate of 25%.

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