Zacks.com Featured Highlights Include: Gilead, Jazz, Amdocs, Arch Capital And Legg Mason
Zacks Investment Research | May 27, 2019 09:36PM ET
For Immediate Release
Chicago, IL – May 28, 2019 - Stocks in this week’s article are Gilead Sciences, Inc. (NASDAQ:GILD) , Jazz Pharmaceuticals plc (NASDAQ:JAZZ) , Amdocs Ltd. (NASDAQ:DOX) , Arch Capital Group Ltd. (NASDAQ:ACGL) and Legg Mason, Inc. (NYSE:LM) .
5 Best PEG Stocks Suitable for GARP Investors
GARP (growth at a reasonable price) investment, often known as a special case of value investment, is gaining popularity among the new generation of investors. According to them, to make a long-term investment more effective, the principles of both value and growth strategies need to be combined.
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 to identify stocks that have solid 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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