At a time when volatility strikes every second day, investors often rely on value investing rather than other options like growth or momentum. As soon as other investors start selling their stocks at a cheaper rate in times of market uncertainty, value investors take this as an opportunity to pick good stocks at a discounted price.

Several stocks that have surged significantly in the recent past have shown the overwhelming success of this pure-play investment strategy. Here, we discuss four such stocks - The Allstate Corporation (ALL Quick QuoteALL - Free Report) , Telefonica, S.A. (TEF Quick QuoteTEF - Free Report) , Enersys (ENS Quick QuoteENS - Free Report) and Commercial Metals Co. (CMC Quick QuoteCMC - Free Report) .

However, this apparently simple value investment technique has some drawbacks, and not understanding the strategy properly may often lead to “value traps.” In such a situation, these value picks start to underperform over the long run as the temporary problems, which once drove the share price down, turn out to be persistent.

There are many value investment yardsticks, such as dividend yield, P/E or P/B, which are simple and can single out whether a stock is trading at a discount.

However, for investors looking to escape such value traps, it is also vital to determine where the stock would be headed in the next 12 to 24 months. Warren Buffett advises these investors to focus on the earnings growth potential of a stock. This is where lies the importance of a not-so-popular value investing metric, the PEG ratio.

PEG Ratio at a Glance

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 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 purposes)

Zacks Rank #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. 

Our PEG-Driven Picks

Here are four of the 17 stocks that qualified the screening:

Allstate: Headquartered in Northbrook, IL, Allstate is the third-largest property-casualty (P&C) insurer and the largest publicly-held personal lines carrier in the United States. It provides a range of life insurance and investment products to its diverse customer base. It offers insurance products to approximately 16 million households through more than 12,000 exclusive agencies and financial specialists in the United States and Canada.

ALL currently has a Zacks Rank #1 and a Value Score of A. It also has an impressive five-year expected growth rate of 18.9%.

Telefonica: Based in Madrid, Spain, Telefonica provides mobile and fixed communication services in Europe and Latin America. In recent years, Telefonica has invested heavily in the deployment and transformation of its network to provide connectivity in terms of capacity, speed, coverage and security.

TEF currently has a Zacks Rank #2 and a Value Score of A. Telefonica also has an impressive five-year expected growth rate of 28.1%.

Enersys:  Headquartered in Pennsylvania, EnerSys engages in the manufacturing, marketing and distribution of various industrial batteries. Additionally, the company develops battery chargers and accessories, power equipment and outdoor cabinet enclosures. This apart, it provides support services for clients.

Apart from a discounted PEG and P/E, ENS currently has a Zacks Rank #2 and a Value Score of B. Enersys has a long-term historical growth rate of 16.5%.

Commercial Metals: Irving, TX-based Commercial Metals manufactures, recycles and markets steel and metal products, related materials and services. It provides these through a network of facilities that includes seven electric arc furnace ("EAF") mini mills, two EAF micro mills, a rerolling mill, steel fabrication and processing plants, construction-related product warehouses, and metal recycling facilities in the United States and Poland.

CMC has a Zacks Rank #1 and a Value Score of A. Commercial Metals also has an impressive five-year expected growth rate of 25.6%.

You can see the complete list of today’s Zacks #1 Rank stocks here.

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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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