5 Best Value Stocks With Low PEG Ratio

The popularity of value investing is growing by leaps and bounds, not just because of its appropriateness in the current market scenario, but mostly for the reason that it is one of the favorite investing mantras of billionaire investors. However, apparently simple to understand, this investing discipline has historically shown dangerous outcomes a number of times just because of people’s oversight of its basics.

Warren Buffet believes that proper understanding of the “intrinsic value” of a stock may ease out many problems in this respect. According to him, going by the fundamentals of value investing, as we pick stocks which the market is currently undervaluing, we also need to focus on the earnings growth potential of a stock.

While yardsticks such as dividend yield, the ratio of price to earnings, to sales or to book value are the most common value investing matrices which can easily single out stocks trading at a discount, these ratios fail to consider the future potential of a stock. PEG is the ratio with earnings growth component in it, however it is supposed to be one of the solutions here.

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 finding 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) 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 offer the best upside potential.

Here are five of the 18 stocks that qualified the screening:

Seagate Technology plc (NASDAQ:STX) : This is an electronic data storage technology and solutions company with business spread across Singapore, the U.S., the Netherlands, among its other markets. Seagate can be an impressive value investment pick with its Zacks Rank #1 and Value Style Score ‘A’. Apart from a discounted PEG and P/E, the stock also has an impressive expected growth rate of 64% for the current fiscal.

POSCO (NYSE:PKX) : POSCO is a steel rolled products and plates provider in South Korea and internationally. This Zacks Rank #1 and Value Style Score ‘A’ company also has an impressive growth rate of 27.5% for the next fiscal. You can see Zacks Investment Research

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Written By: Zacks Investment Research