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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 19.8% CAGR for Berkshire Hathaway from 1965 through 2023. This compares favorably with a 10.2% 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 four such stocks — Signet Jewelers (SIG - Free Report) , Valero Energy (VLO - Free Report) , Marathon Petroleum (MPC - Free Report) and Lundin Mining (LUNMF - Free Report) .
More on Value Investing
While searching for a suitable investment option, value investors with a varied risk appetite are unlikely to consider 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 the four stocks that qualified the screening:
Signet Jewelers: Headquartered in Hamilton, Bermuda, Signet Jewelers is a retailer of diamond jewelry, watches and other products. The company operates in the United States, Canada, the U.K., the Republic of Ireland and the Channel Islands.Signet Jewelers is consistently integrating its physical stores with advanced virtual experiences through data-driven in-store consultations and services like buy online pickup in store and curbside options.
Valero: San Antonio, TX-based Valero Energy is the largest independent refiner and marketer of petroleum products in the United States. It has a refining capacity of 3.1 million barrels per day across 15 refineries located throughout the United States, Canada and the United Kingdom. Moreover, Valero is a leading ethanol producer with 14 ethanol plants in the Midwest that have a combined capacity of 1.73 billion gallons per year.
Valero currently holds a Zacks Rank #2 and has a Value Score of A. Valero also has an impressive five-year historical growth rate of 32.2%.
Marathon Petroleum: Findlay, OH-based Marathon Petroleum 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 currently has a Zacks Rank #2 and a Value Score of A. Marathon Petroleum has a long-term historical growth rate of 34.7%.
Lundin Mining: It is a diversified Canadian base metals mining company with operations and projects in Argentina, Brazil, Chile, Portugal, Sweden and the United States of America. Lundin Mining primarily produces copper, zinc, gold, nickel, and molybdenum, as well as lead, silver, and other metals.
Lundin Mining has an impressive long-term expected growth rate of 19.9%. Lundin Mining stock currently has a Value Score of B and a Zacks Rank of 2.
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.
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4 Attractive Value Picks Based on Discounted PEG
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 19.8% CAGR for Berkshire Hathaway from 1965 through 2023. This compares favorably with a 10.2% 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 four such stocks — Signet Jewelers (SIG - Free Report) , Valero Energy (VLO - Free Report) , Marathon Petroleum (MPC - Free Report) and Lundin Mining (LUNMF - Free Report) .
More on Value Investing
While searching for a suitable investment option, value investors with a varied risk appetite are unlikely to consider 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 the four stocks that qualified the screening:
Signet Jewelers: Headquartered in Hamilton, Bermuda, Signet Jewelers is a retailer of diamond jewelry, watches and other products. The company operates in the United States, Canada, the U.K., the Republic of Ireland and the Channel Islands.Signet Jewelers is consistently integrating its physical stores with advanced virtual experiences through data-driven in-store consultations and services like buy online pickup in store and curbside options.
Signet Jewelers has a long-term historical growth rate of 16.9%. Signet Jewelers 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.
Valero: San Antonio, TX-based Valero Energy is the largest independent refiner and marketer of petroleum products in the United States. It has a refining capacity of 3.1 million barrels per day across 15 refineries located throughout the United States, Canada and the United Kingdom. Moreover, Valero is a leading ethanol producer with 14 ethanol plants in the Midwest that have a combined capacity of 1.73 billion gallons per year.
Valero currently holds a Zacks Rank #2 and has a Value Score of A. Valero also has an impressive five-year historical growth rate of 32.2%.
Marathon Petroleum: Findlay, OH-based Marathon Petroleum 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 currently has a Zacks Rank #2 and a Value Score of A. Marathon Petroleum has a long-term historical growth rate of 34.7%.
Lundin Mining: It is a diversified Canadian base metals mining company with operations and projects in Argentina, Brazil, Chile, Portugal, Sweden and the United States of America. Lundin Mining primarily produces copper, zinc, gold, nickel, and molybdenum, as well as lead, silver, and other metals.
Lundin Mining has an impressive long-term expected growth rate of 19.9%. Lundin Mining stock currently has a Value Score of B and a Zacks Rank of 2.
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