Zacks.com Featured Highlights Include: McKesson, United Therapeutics, Virtusa And Cardinal Health
Zacks Investment Research | Feb 28, 2020 06:43AM ET
For Immediate Release
Chicago, IL – February 28, 2020 – Stocks in this week’s article are McKesson Corp. (NYSE:MCK) , United Therapeutics (NASDAQ:UTHR) , Virtusa Corporation (NASDAQ:VRTU) and Cardinal Health, Inc. (NYSE:CAH) .
4 Finest Value Stocks Based on Discounted PEG
Value investing is gaining popularity by the day. The success of value investors like Warren Buffett further underscores this. Buffett and his business partner, Charlie Munger, managed to register 20.3% compound annual growth in the market value of Berkshire Hathaway (NYSE:BRKa) from 1965 through 2019 as compared with the 10% gain of the S&P 500 during the same period.
However, while searching for a suitable investment option, value investors with varied risk appetite, are unlikely to consider price/earnings to growth (PEG) ratio among a number of other popular metrics like price/earnings (P/E), price/sales (P/S) or price/book value (P/B).
This is because they often find this ratio complicated, considering the limitations in calculating the future earnings growth potential of a stock. Yardsticks, such as dividend yield, P/E or P/B, are most commonly used to single out stocks trading at a discount.
However, these ratios, while not taking into account the future growth potential of a stock, might end up convincing us to invest in stocks that are at a discount just because of their poor show. This might often lead to “value traps” — a situation when these value picks start to underperform over the long run as the temporary problems, which once pulled down the share price, turn out to be persistent.
In such a case, even if you buy a stock at less than its fair value, you might still end up paying more. And here comes the importance of this not-so-popular but crucial 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 find the intrinsic value 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 over 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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