5 Best Bargain PEG Stocks That Value Investors Love
Zacks Investment Research | Jun 14, 2018 09:23PM ET
When it comes to value investing, the name that comes to the forefront is none other than Warren Buffett. The Oracle (NYSE:ORCL) of Omaha’s fortune trail can be solely attributed to value investment. His success story, which started 60 years back, clearly underscores how value investment has helped him to transform less than $10,000 into a net worth of $91.1 billion till February 2018 (data per a CNBC article).
Traditionally, the simplest method to decide whether a stock is overvalued or discounted is to determine its price-to-earnings ratio (P/E) and compare it with the P/E of the market or peer group. If you find the stock’s P/E is higher than that of the market, you can conclude that it is an expensive bid and vice versa.
However, the problem arises when a stock apparently with an attractively lower P/E faces a dearth of catalysts to propel future growth. In such a case, if you buy the stock depending solely on its lower P/E, you might still end up paying more on the risk that the stock may falter soon. To avoid such value traps, Warren Buffett advises investors to focus on the earnings growth potential of a stock while judging the intrinsic value. And here lies the importance of a not-so-popular value investing metric, the PEG ratio.
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 to 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 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 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 purpose.)
Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) (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 offer the best upside potential.
Here are five out of 16 stocks that qualified the screening:
Jazz Pharmaceuticals plc (NASDAQ:JAZZ) : This is an international biopharmaceutical company focused on improving patients' lives by identifying, developing and commercializing meaningful products that address unmet medical needs. The stock can be an impressive value investment pick with its Zacks Rank #2 and a Value Score of B. Apart from a discounted PEG and P/E, the stock also has an impressive long-term expected growth rate of 16.7%.
Nutrisystem, Inc. (NASDAQ:NTRI) : The company is a prominent name in the field of weight-loss industry. The company offers weight-loss programs that consist primarily of a pre-packaged food program, digital tools, and counseling. Apart from a Zacks Rank #2 and a Value Score of A, the company also has an impressive growth rate of 17.5% for the next five years.
ACCO Brands Corporation (NYSE:ACCO) : This is one of the world's largest designers, marketers and manufacturers of branded academic, consumer and business products. The company has an impressive current-year growth rate of 14.3%. The stock has a Value Score of A and a Zacks Rank #2. You can see Zacks Investment Research
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