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In a market hurt by external shocks, equity investments need to be properly hedged. A question that arises frequently is whether one should resort to a value strategy that seeks discounted stocks or opt for growth investing in times of extreme market instability.
The investing track of the Oracle of Omaha over the past few decades and his gradual shift from being a pure-play value investor to a GARP (growth at a reasonable price) investor might give us all the answers.
In this regard, we should take note that strategic mingling of both growth and value investing principles gives us a mixed investing strategy that is getting popular with each passing day. What GARPers look for is whether the stocks are somewhat undervalued and have solid sustainable growth potential (Investopedia).
And here comes 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 the idea of stocks, which are trading at a discount, PEG while adding the GROWTH element in it, helps in finding those stocks that have solid future potential.
A lower PEG ratio is always better for investors.
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 rates 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 (Hold), offer the best upside potential.
Here are five of the 51 stocks that qualified the screening:
Molson Coors Beverage (TAP - Free Report) is a leading global manufacturer and seller of beer and other beverage products and has an impressive and diverse portfolio of owned and partner brands, which include global priority brands such as Blue Moon, Miller Lite, CoorsBanquet, Coors Light, Miller Genuine Draft and Staropramen as well as regional champion brands like Carling, Molson Canadian. The stock can be an impressive value investment pick with its Zacks Rank #2 and a Value Score of B. Apart from a discounted PEG and P/E, the stock has an impressive long-term expected growth rate of 3.7%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Owens & Minor, Inc. (OMI - Free Report) : This healthcare solutions company exhibited improved results courtesy of increased productivity, higher manufacturing output related to personal protective equipment (PPE), favorable revenue mix, and continued execution and delivery of operating efficiencies for the greater part of 2020. The stock can also be an impressive value investment pick with its Zacks Rank #1 and a Value Score of A. Apart from a discounted PEG and P/E, the stock also has an impressive long-term historical growth rate of 45.2%.
The Toronto-Dominion Bank (TD - Free Report) : The company provides personal and commercial banking products and services in Canada and the United States and operates through three segments: Canadian Retail, U.S. Retail, and Wholesale Banking. The company has an impressive long-term historical growth rate of 8.2%. The stock currently has a Value Score of B and carries a Zacks Rank of 2.
McKesson Corporation (MCK - Free Report) : This is a healthcare services and information technology company. McKesson operates through two segments, The Distribution Solutions and The Technology Solutions. Apart from a discounted PEG and P/E, the stock has a Value Score of A and holds a Zacks Rank #2, at present. The company has an impressive long-term historical growth rate of 7.3%.
Honda Motor Co., Ltd. (HMC - Free Report) : This is a leading manufacturer of automobiles and the largest producer of motorcycles in the world. The company is recognized internationally for its wide variety of products, ranging from small general-purpose engines to specialty sports cars, which incorporate its efficient internal combustion engine technologies. The stock can also be an impressive value investment pick with its Zacks Rank #1 and a Value Score of A. Apart from a discounted PEG and P/E, the stock also has an impressive long-term expected growth rate of 19.2%.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
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5 Finest GARP Stocks Based on Discounted PEG
In a market hurt by external shocks, equity investments need to be properly hedged. A question that arises frequently is whether one should resort to a value strategy that seeks discounted stocks or opt for growth investing in times of extreme market instability.
The investing track of the Oracle of Omaha over the past few decades and his gradual shift from being a pure-play value investor to a GARP (growth at a reasonable price) investor might give us all the answers.
In this regard, we should take note that strategic mingling of both growth and value investing principles gives us a mixed investing strategy that is getting popular with each passing day. What GARPers look for is whether the stocks are somewhat undervalued and have solid sustainable growth potential (Investopedia).
And here comes 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 the idea of stocks, which are trading at a discount, PEG while adding the GROWTH element in it, helps in finding those stocks that have solid future potential.
A lower PEG ratio is always better for investors.
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 rates 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 (Hold), offer the best upside potential.
Here are five of the 51 stocks that qualified the screening:
Molson Coors Beverage (TAP - Free Report) is a leading global manufacturer and seller of beer and other beverage products and has an impressive and diverse portfolio of owned and partner brands, which include global priority brands such as Blue Moon, Miller Lite, CoorsBanquet, Coors Light, Miller Genuine Draft and Staropramen as well as regional champion brands like Carling, Molson Canadian. The stock can be an impressive value investment pick with its Zacks Rank #2 and a Value Score of B. Apart from a discounted PEG and P/E, the stock has an impressive long-term expected growth rate of 3.7%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Owens & Minor, Inc. (OMI - Free Report) : This healthcare solutions company exhibited improved results courtesy of increased productivity, higher manufacturing output related to personal protective equipment (PPE), favorable revenue mix, and continued execution and delivery of operating efficiencies for the greater part of 2020. The stock can also be an impressive value investment pick with its Zacks Rank #1 and a Value Score of A. Apart from a discounted PEG and P/E, the stock also has an impressive long-term historical growth rate of 45.2%.
The Toronto-Dominion Bank (TD - Free Report) : The company provides personal and commercial banking products and services in Canada and the United States and operates through three segments: Canadian Retail, U.S. Retail, and Wholesale Banking. The company has an impressive long-term historical growth rate of 8.2%. The stock currently has a Value Score of B and carries a Zacks Rank of 2.
McKesson Corporation (MCK - Free Report) : This is a healthcare services and information technology company. McKesson operates through two segments, The Distribution Solutions and The Technology Solutions. Apart from a discounted PEG and P/E, the stock has a Value Score of A and holds a Zacks Rank #2, at present. The company has an impressive long-term historical growth rate of 7.3%.
Honda Motor Co., Ltd. (HMC - Free Report) : This is a leading manufacturer of automobiles and the largest producer of motorcycles in the world. The company is recognized internationally for its wide variety of products, ranging from small general-purpose engines to specialty sports cars, which incorporate its efficient internal combustion engine technologies. The stock can also be an impressive value investment pick with its Zacks Rank #1 and a Value Score of A. Apart from a discounted PEG and P/E, the stock also has an impressive long-term expected growth rate of 19.2%.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.