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5 Cheap PEG Picks for Value Investors Right Now

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Investment is becoming a challenging task with each passing day, thanks to the global stock market's persistent inconstancy on political or economic factors. While President Donald Trump’s first budget blue print has started to create quite a stir within the investment world, it is always wise to rely on tried and trusted strategies.

As per a Forbes article, shares of Berkshire Hathaway, owned by the world’s most successful value investor Warren Buffett, increased 20% in 2016, boosting the Oracle of Omaha’s personal fortune by $12.3 billion (more than any other billionaire in the U.S.) to $74.2 billion. This once again underscores the importance of value investing as the most tempting strategy to bet on even amid capricious market conditions.

Buffett believes that proper understanding of the “intrinsic value” of a stock may ease out many problems with regard to value investment. According to him, going by the fundamentals of value investing, while picking undervalued stocks, we also need to focus on their earnings growth potential.

While yardsticks such as dividend yield, the ratio of price to earnings, sales or book value are the most common value investing matrices that can easily single out stocks trading at a discount, these ratios fail to consider the potential of a stock. PEG is the ratio with the earnings growth component in it.

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 find 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 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 (Hold) offer the best upside potential. 

Here are five of the 13 stocks that qualified the screening:

Cosan Limited : Cosan Limited was established as the controlling shareholder of Cosan S.A., a Brazilian company that is engaged in the cultivation, harvesting and processing of sugarcane, the main raw material used for producing sugar and ethanol. The company has an impressive expected five-year growth rate of 16.3%. The stock currently has a Value Style Score of ‘A’ and a Zacks Rank #1. You can seethe complete list of today’s Zacks #1 Rank stocks here.

Leucadia National Corporation : This is a diversified holding company that invests in a broad array of businesses. The company’s financial services businesses and investments include investment banking and capital markets, asset management, foreign exchange trading services, real estate, commercial mortgage banking and servicing and vehicle finance. This Zacks Rank #1 stock also holds a Value Style Score of ‘B’ and hence can be a great value investment pick at the moment.

Ternium S.A. (TX - Free Report) : This is a manufacturer and processer of various steel products in Mexico, Argentina, Bolivia, Chile, Paraguay, Uruguay, the U.S., Central America, Colombia, and other parts of the world. It operates through two segments – Steel and Mining. The company holds a Zacks Rank #1 and has a Value Style Score 'A'. The stock also has an impressive long-term earnings growth rate of 18.4%.

Grifols, S.A. (GRFS - Free Report) : Grifols is a global healthcare company that works on the development of plasma protein therapies, hospital pharmacy products and diagnostic technology for clinical use. Headquartered in Barcelona, Spain, the company is currently present in more than 100 countries. The stock currently flaunts a Zacks Rank #2 and has a Value Style Score of ‘A’. The company also has an impressive growth rate of 18.1% for the next year.

ACCO Brands Corporation (ACCO - Free Report) : This company designs, markets and manufactures branded business, academic and consumer products. ACCO Brands designs, manufactures, sources, markets and sells office products, academic supplies, and calendar products, primarily in the U.S., Canada, Northern Europe, Brazil, Australia, and Mexico. Apart from a discounted PEG and P/E, the stock holds a Zacks Rank #1 and a Value Style Score of ‘B’.

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.

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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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