Zacks.com Featured Highlights Include: Bristol-Myers Squibb, Urban Outfitters, Hewlett Packard, Cardinal Health And British American Tobacco
Zacks Investment Research | Nov 19, 2019 09:47PM ET
For Immediate Release
Chicago, IL – November 20, 2019 - Stocks in this week’s article are Bristol-Myers Squibb Co. (NYSE:BMY) , Urban Outfitters, Inc. (NASDAQ:URBN) , Hewlett Packard Enterprise Co. (NYSE:HPE) , Cardinal Health, Inc. (NYSE:CAH) and British American Tobacco (LON:BATS) p.l.c. (NYSE:BTI) .
5 Excellent GARP Stocks with Discounted PEG
The investment pattern of the young generation is shifting to hybrid investment from pure play theories like growth or value. According to them, to make a long-term investment more effective, the principles of both value and growth strategies need to be combined.
Consequently, GARP (growth at a reasonable price) investment, often known as a special case of value investment, is gaining popularity. What GARPers look for is whether the stocks are somewhat undervalued and have solid sustainable growth potential (Investopedia).
And here lies the importance of a not-so-popular fundamental metric, the price/earnings growth (PEG) ratio. 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 the stocks P/E ratio with future earnings growth rate.
While P/E alone only gives an idea of stocks that are trading at a discount, PEG, while adding the growth element to it, helps 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 that 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 doesn't 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.
For the rest of this Screen of the Week article please visit Zacks.com at:Zacks Investment Research
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