For Immediate Release
Chicago, IL – November 21, 2017 - Stocks in this week’s article Boot Barn Holdings, Inc. (BOOT - Free Report) , Perrigo Company plc (PRGO - Free Report) , Boise Cascade Company (BCC - Free Report) , DXC Technology Company (DXC - Free Report) and Koppers Holdings Inc. (KOP - Free Report) .
Bet on These 5 GARP Stocks Based on Low PEG Ratio
In the course of strict screening to determine the intrinsic value of a company, investors often miss the chance of betting on stocks that have bright long-term prospects. The same way, growth investors often end up investing in expensive stocks.
If we keenly observe the investment track of the Oracle of Omaha, we can see how, in quest of eliminating these hazards, this pure play value investor has gradually shifted to a mixed investment strategy or more precisely GARP (growth at a reasonable price) strategy.
This strategy combines both growth and value investing principles and has a proven track record of success. What GARPers look for is whether the stocks are somewhat undervalued and have solid sustainable growth potential (Investopedia).
Here lies the importance of a not-so-popular fundamental metric, 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 future earnings growth rate.
While P/E alone only gives the idea of stocks, which are trading at a discount, PEG while adding the GROWTH element to it, helps to find those stocks that have 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 expected long-term growth rate is 15%, the company’s PEG will come down to 0.66, a ratio which indicates both undervaluation and future growth potential.
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 very high growth rates 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.
For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/283380/bet-on-these-5-garp-stocks-based-on-low-peg-ratio
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