5 Best PEG Stocks Value Investors Love

With externalities impacting stock markets every second day, investors with varied risk appetite prefer to go for value investing. In the event of a market crash, investors often end up to selling their holdings in a panic. But Warren Buffett advises investors to grab the opportunity and buy bargain stocks at cheap prices. However, this apparently simple-to- understand investing discipline has historically shown dangerous outcomes owing to people’s oversight of the basics.

Warren Buffett believes that proper understanding of the “intrinsic value” of a stock will make the task easier. Yardsticks such as dividend yield, the ratio of price to earnings or to book value are the most common forms of intrinsic value calculation, which can easily single out the stocks that the market is currently undervaluing. However, these ratios fail to consider the future potential of a stock. And here comes the importance of a not-so-popular value investing metric, the PEG ratio. This ratio with earnings growth component in it may help to determine the prospects of a stock.

The PEG ratio is defined as: (Price/ Earnings)/Earnings Growth Rate

A lower 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 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), 2 (Buy) or 3 (Hold) (whether good market conditions or bad, stocks with a Zacks Rank #1, #2 and #3 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.

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Written By: Zacks Investment Research