Investment has never been as daunting a task as it is today; with the world stock market’s continuous wobbling on multiple factors – economic or political. Volatility of the market does not depend on whether these factors are short-lived or not. Rather it is based on the frequency of these external shocks that is unfortunately ever increasing. The biggest challenge, for us is how to keep the portfolio safe and lucrative amid persisting upheavals.
If we have to go by Warren Buffet’s formula, it is value investing that can offer the succor we need in tough times. Value investing has especially proven its worth during times of market crash or global downturn.
However, failing to choose the right value strategy, which gives investors a precise idea on the intrinsic value of a stock, may lead to traps. In other words, it could lead to a situation in which these picks start to underperform, as those temporary problems which once drove share price down may turn out to be endemic. To avoid such value traps, Buffet has advised investors to keep a focus on the earnings growth potential of a stock. And here lies the significance of an out-in-the-cold value investing metric, the PEG ratio.
PEG is the ratio with earnings growth component in it, however it is supposed to be one of the solutions here.
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’ limitations in calculating 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) 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 offer the best upside potential.
Here are five of the 16 stocks that qualified the screening:
Rio Tinto plc ((RIO - Free Report) ): This popular name in the mining and metals market mines and produces aluminum products, copper, gold, silver, and molybdenum, nickel, and diamonds among others. The company can be an impressive value investment pick with its Zacks Rank #1 and Value Style Score ‘B’. Apart from a discounted PEG and P/E, the stock also has an impressive expected growth rate of 30.3% for the next fiscal.
Sabre Corporation (SABR - Free Report) : This is the leading technology provider to the global travel industry. Sabre's software, data, mobile and distribution solutions are used by hundreds of airlines and thousands of hotel properties to manage critical operations, including passenger and guest reservations, revenue management, flight, network and crew management. The company can be an impressive value investment pick with its Zacks Rank #1 and Value Style Score ‘A’. The company’s long-term expected earnings growth rate is 17.3%.
Target Corporation (TGT - Free Report) : Headquartered in Minneapolis, MN, Target Corporation (TGT - Free Report) operates as a general merchandise retailer in the U.S. Target’s initiatives, including the development of omni-channel capacities, diversification and localization of assortments along with emphasis on flexible format stores, bode well. This Zacks Rank #2 company has a Value Style Score ‘A’ and an impressive growth rate of 11.2% for the current fiscal. You can see the complete list of today’s Zacks #1 Rank stocks here.
Teradyne, Inc. (TER - Free Report) : This is a leading supplier of automation equipment for test and industrial applications. Teradyne can be an impressive value investment pick with its Zacks Rank #1 and Value Style Score ‘B’. Apart from a discounted PEG and P/E, the stock also has an impressive expected growth rate of 11.3% for the current fiscal compared to the industry average of 4.8%.
Applied Materials, Inc. (AMAT - Free Report) : This company is a provider of manufacturing equipment, services, and software to the semiconductor, display, solar photovoltaic (PV), and related industries worldwide. The company sports a Zacks Rank #1 and a Value Style Score ‘B’. It also has an impressive growth rate of 37.4% for the current fiscal.
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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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