With smart investment being the buzzword in today’s investment world, millennials are more inclined toward hybrid investment patterns rather than traditional pure play theories like value or growth.
The logic behind this is the effectiveness of a mixed investment strategy as value or growth investing approaches come with their own share of pitfalls. A pure play value investor misses the chance of betting on stocks that have bright long-term prospects. The same way, growth investors often end up investing in expensive stocks. In other words, to make a long-term investment more effective, the principles of both value and growth strategies need to be combined.
The quest for a mixed investment strategy led to the introduction of the GARP (growth at a reasonable price) approach. What GARPers look for is whether the stocks are somewhat undervalued and have solid sustainable growth potential (Investopedia).
One of the fundamental metrics for finding GARP is price/earnings growth ratio (PEG). 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 a stock’s 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 does not consider the very common situation of changing growth rates such as the forecast of the first three years at very high growth rate 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 (Hold) offer the best upside potential.
Here are five of the 14 stocks that qualified the screening:
AbbVie Inc. (ABBV - Free Report) : North Chicago, IL-based AbbVie is a biopharmaceutical company focusing on the development and marketing of treatments for complex and serious ailments. The company has a presence in the rheumatoid arthritis, cancer, psoriasis, Crohn’s disease, HIV, hepatitis C virus (HCV), thyroid disease, Parkinson’s disease, ulcerative colitis, endometriosis and cystic fibrosis markets. The stock can be an impressive value investment pick with its Zacks Rank #2 and Value Score of A. Apart from a discounted PEG and P/E, the stock also has an impressive long-term historical growth rate of 19.1%.
Varian Medical Systems, Inc. (VAR - Free Report) : The company is a leading provider of radiotherapy, radiosurgery, proton therapy and brachytherapy for treating cancer and other medical conditions. The stock can also be an impressive value investment pick with its Zacks Rank #2 and Value Score of B. Apart from a discounted PEG and P/E, the stock also has an impressive long-term historical growth rate of 8%. You can see the complete list of today's Zacks #1 Rank stocks here.
Guess, Inc. (GES - Free Report) designs, markets, distributes and licenses casual apparel and accessories for men, women and children per American lifestyle and European fashion sensibilities. The company has an impressive long-term expected growth rate of 17.5%. The stock currently has a Value Score of B and a Zacks Rank #1.
Whirlpool Corporation (WHR - Free Report) : Benton Harbor, MI-based Whirlpool is one of the largest manufacturers of home appliances in the world. Apart from a discounted PEG and P/E, the stock has a Value Score of A and holds a Zacks Rank #2.
SYNNEX Corporation (SNX - Free Report) : This is a business process services company, providing a comprehensive range of distribution, logistics and integration services for the technology industry and providing outsourced services focused on customer engagement to a broad range of enterprises. The stock carries a Zacks Rank #2 and has a Value Score of A.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
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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.