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How to Use a Basic PEG Screen to Find Value Stocks

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  • (0:30) - Small Cap Growth vs. Value Stocks
  • (3:00) - Zacks Stock Screen: Value Stocks With Growth
  • (5:30) - Tracey's Top Stock Picks
  • (14:45) - Takeaways From Using The PEG Ratio
  • (17:25) - Episode Roundup: Podcast@Zacks.com

Welcome to Episode #72 of the Value Investor Podcast

Every week, Tracey Ryniec, the editor of Zacks Value Investor portfolio service, shares some of her top value investing tips and stock picks.

As the year winds down, it’s clear that one area of winners in 2017 on Wall Street have been the growth stocks. That extends even to small cap growth which has dominated the small cap universe.

Value, while it is up on the year, hasn’t performed as well as the other investing styles.

Heading into 2018, it’s unclear whether value will see a rebound or if growth will take the crown again. Why not plan on both scenarios?

Finding Value Stocks Using a Basic Screen

One-way value investors can hedge their bets is by buying value stocks that also have growth. This is a very powerful combination, if you can find it.

Tracey decided to run a screen using just a few metrics to see out the growth component along with value.

She started with the Zacks Ranks of #1 (Strong Buy), #2 (Buy) or #3 (Hold). By including the Holds that widened the screen as most stocks are found in that category.

Then she combined it with a PEG ratio under 1.0. A PEG under one usually indicates that a company is undervalued but that it also has growth. It’s cheap growth.

And that’s it. Just those two metrics.

Because she started with a wide screen, she got 148 stocks.

Here are some of the stocks that caught her eye in some of the industries everyone will be watching in 2018.

5 Stocks with PEGs Under 1.0

1.      Diamondback Energy (FANG - Free Report) has a PEG of just 0.8. The energy sector was ignored by Wall Street in 2017 even though the earnings outlook is much improved over 2016. Will these stocks see big gains in 2018?

2.     KB Home (KBH - Free Report) is still cheap even though shares have soared in 2017. It has a PEG of 0.7 and is expected to grow earnings another 23% in 2018.

3.     Pulte (PHM - Free Report) is another large homebuilder that no one is talking about. Who cares about the homebuilders when you can buy Nvidia, right? But Pulte is also cheap. It has a PEG ratio of 0.9 and is expected to grow earnings by 37% in 2018. Is it too late to get in?

4.     Royal Caribbean (RCL - Free Report) is still producing double digit earnings growth as consumers want “experiences” and travel fits right into that. This cruise company has a PEG of 0.8. Earnings are expected to jump another 15.4% next year.

5.     Macy’s (M - Free Report) is one of 9 retailers that came up in the screen. It has bounced off its recent lows, when it was trading with a P/E of around 5.0. It now has a P/E of 7.6 and a PEG of 0.9. But will earnings rebound next year as well?

Investors should also take a look at some of the smaller, specialty retailers like The Tile Shop (TTS). It has a PEG of 0.8.

Remember, to always research the companies before you buy. This was a basic screen with few metrics. It doesn’t tell you the whole picture.

Additionally, the semiconductors were well-represented in the screen, as they have big growth projections and are cheap.

Tracey covered this group in a recent podcast called The Semiconductors: Value Stocks or a Trap?

Where else can you find value stocks with growth heading into 2018?

Tune into this week’s podcast to find out.

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