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In the equity market, investments need to be prudently hedged to overcome uncertainties and limit losses related to external shocks. A question that arises often is whether one should resort to a value strategy that seeks discounted stocks or opt for growth investing in times of extreme market instability.
The investing track of the Oracle of Omaha over the past few decades and his gradual shift from being a pure-play value investor to a GARP (growth at a reasonable price) investor might give us all the answers.
Per the GARP theory, the strategic mingling of growth and value-investing principles gives us a hybrid strategy, offering an ideal investment 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 (Investopedia).
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 American Eagle Outfitters, JD.com, PDD Holdings Inc., Air Lease and Tencent Music Entertainment Group.
A Few More Words on GARP
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 the stocks’ P/E ratio with the 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 in calculating 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 a 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 five stocks out of the seven that qualified the screening:
American Eagle: Based in Pittsburgh, PA, American Eagle is a specialty retailer of casual apparel, accessories and footwear for men and women aged 15–25 years. American Eagle, along with its subsidiaries, engages in the designing and marketing of casual clothing. The company’s assortment includes jeans, cargo pants, graphic T-shirts, as well as a range of accessories, outerwear and footwear.
AEO stock can be an impressive pick with its Zacks Rank #1 and a Value Score of A. Apart from a discounted PEG and P/E, American Eagle also has an impressive long-term expected growth rate of 12.5%.
JD.com: It is a leading supply chain-based technology and service provider. The company’s cutting-edge retail infrastructure seeks to enable consumers to buy anything anywhere. The company has opened its technology and infrastructure to partners, brands and other sectors as part of its Retail as a Service offering to help drive productivity and innovation across a range of industries.
JD stock can also be an impressive GARP investment pick with its Zacks Rank #1 and Value Score of A. Apart from a discounted PEG and P/E, JD.com also has a solid long-term historical growth rate of 63.5%.
PDD Holdings: It is a multinational commerce group that owns and operates a portfolio of businesses. PDD Holdings aims to bring more businesses and people into the digital economy so that local communities and small businesses can benefit from the increased productivity and new opportunities.
PDD has an impressive growth rate of 49.3% for the next five years. The stock currently has a Value Score of B and carries a Zacks Rank #1.
Air Lease: Los Angeles, CA-based Air Lease is a leading aircraft leasing company. It is primarily involved in purchasing commercial aircraft directly from the manufacturers, leasing the same to its airline customers across the globe. Some noteworthy manufacturers that the company works with are The Boeing Company and Airbus S.A.S.
Air Lease carries a Zacks Rank of 2 and has a Value Score of A. AL has an impressive long-term expected growth rate of 13%.
Tencent Music Entertainment: It is a leading online music and audio entertainment platform in China, operating the country's popular music apps — QQ Music, Kugou Music, Kuwo Music and WeSing. TME's platform comprises online music, online audio, online karaoke, music-centric live streaming and online concert services, enabling music fans to discover, listen, sing, watch, perform and socialize around music.
Tencent Music Entertainment can also be an impressive value investment pick with its Zacks Rank #2 and a Value Score of B. Apart from a discounted PEG and P/E, the stock also has a solid long-term expected growth rate of 27.7%.
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.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks.com featured highlights American Eagle Outfitters, JD.com, PDD Holdings, Air Lease and Tencent Music Entertainment
For Immediate Release
Chicago, IL – April 3, 2024 – Stocks in this week’s article are American Eagle Outfitters (AEO - Free Report) , JD.com (JD - Free Report) , PDD Holdings Inc. (PDD - Free Report) , Air Lease (AL - Free Report) and Tencent Music Entertainment Group (TME - Free Report) .
5 Profitable PEG-Based GARP Stocks for Investors
In the equity market, investments need to be prudently hedged to overcome uncertainties and limit losses related to external shocks. A question that arises often is whether one should resort to a value strategy that seeks discounted stocks or opt for growth investing in times of extreme market instability.
The investing track of the Oracle of Omaha over the past few decades and his gradual shift from being a pure-play value investor to a GARP (growth at a reasonable price) investor might give us all the answers.
Per the GARP theory, the strategic mingling of growth and value-investing principles gives us a hybrid strategy, offering an ideal investment 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 (Investopedia).
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 American Eagle Outfitters, JD.com, PDD Holdings Inc., Air Lease and Tencent Music Entertainment Group.
A Few More Words on GARP
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 the stocks’ P/E ratio with the 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 in calculating 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 a 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 five stocks out of the seven that qualified the screening:
American Eagle: Based in Pittsburgh, PA, American Eagle is a specialty retailer of casual apparel, accessories and footwear for men and women aged 15–25 years. American Eagle, along with its subsidiaries, engages in the designing and marketing of casual clothing. The company’s assortment includes jeans, cargo pants, graphic T-shirts, as well as a range of accessories, outerwear and footwear.
AEO stock can be an impressive pick with its Zacks Rank #1 and a Value Score of A. Apart from a discounted PEG and P/E, American Eagle also has an impressive long-term expected growth rate of 12.5%.
You can see the complete list of today’s Zacks #1 Rank stocks here.
JD.com: It is a leading supply chain-based technology and service provider. The company’s cutting-edge retail infrastructure seeks to enable consumers to buy anything anywhere. The company has opened its technology and infrastructure to partners, brands and other sectors as part of its Retail as a Service offering to help drive productivity and innovation across a range of industries.
JD stock can also be an impressive GARP investment pick with its Zacks Rank #1 and Value Score of A. Apart from a discounted PEG and P/E, JD.com also has a solid long-term historical growth rate of 63.5%.
PDD Holdings: It is a multinational commerce group that owns and operates a portfolio of businesses. PDD Holdings aims to bring more businesses and people into the digital economy so that local communities and small businesses can benefit from the increased productivity and new opportunities.
PDD has an impressive growth rate of 49.3% for the next five years. The stock currently has a Value Score of B and carries a Zacks Rank #1.
Air Lease: Los Angeles, CA-based Air Lease is a leading aircraft leasing company. It is primarily involved in purchasing commercial aircraft directly from the manufacturers, leasing the same to its airline customers across the globe. Some noteworthy manufacturers that the company works with are The Boeing Company and Airbus S.A.S.
Air Lease carries a Zacks Rank of 2 and has a Value Score of A. AL has an impressive long-term expected growth rate of 13%.
Tencent Music Entertainment: It is a leading online music and audio entertainment platform in China, operating the country's popular music apps — QQ Music, Kugou Music, Kuwo Music and WeSing. TME's platform comprises online music, online audio, online karaoke, music-centric live streaming and online concert services, enabling music fans to discover, listen, sing, watch, perform and socialize around music.
Tencent Music Entertainment can also be an impressive value investment pick with its Zacks Rank #2 and a Value Score of B. Apart from a discounted PEG and P/E, the stock also has a solid long-term expected growth rate of 27.7%.
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.
For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/2248924/5-profitable-peg-based-garp-stocks-for-investors
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Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.