In a market dealing with external shocks, value investing or the strategy of putting money in underappreciated stocks, is fast gaining popularity. Although these stocks are apparently cheap compared to their peers and market, investment is made with the hope that the stock price will appreciate reasonably to match the intrinsic value of the business.

Several stocks that have surged significantly in the recent past have shown the overwhelming success of this pure-play investment strategy. Here, we discuss five such stocks — Oshkosh Corporation (OSK Quick QuoteOSK - Free Report) , Everest Group (EG Quick QuoteEG - Free Report) , Leidos Holdings, Inc. (LDOS Quick QuoteLDOS - Free Report) , Itron, Inc. (ITRI Quick QuoteITRI - Free Report) and Integer Holdings (ITGR Quick QuoteITGR - Free Report) .

More on Value Investing

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, may end up convincing us to invest in stocks that are at a discount just because of their poor show. This may 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 to find the intrinsic value of a stock.

There are some drawbacks to using the PEG ratio though. It doesn’t consider the 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 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 some of 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 out of the 14 stocks that qualified the screening:

Oshkosh: WI-based Oshkosh is a producer and seller of a varied range of vehicle bodies and specialty vehicles. It is also engaged in equipment financing and leasing solutions for its customers, primarily through third-party funding arrangements. Oshkosh has manufacturing operations in the United States, Australia, Canada, China, France, Mexico and the United Kingdom, apart from the seven states of the United States.

OSK has a long-term expected growth rate of 42.4%. OSK currently carries a Zacks Rank of #2 and has a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

Everest Group: Based in Warren, NJ, Everest Group, a Delaware reinsurance company and a direct subsidiary of Holdings, is a property and casualty insurer and reinsurer in all states, the District of Columbia, Puerto Rico and Guam. The company’s business strategy is to sustain its leadership position within targeted reinsurance and insurance markets, provide effective management throughout the property and casualty underwriting cycle and achieve an attractive return for its shareholders.

Everest Group currently holds a Zacks Rank #2 and has a Value Score of A. Everest Group also has an impressive five-year expected growth rate of 34.4%.

Leidos Holdings: Delaware-based Leidos Holdings, Inc. is a global science and technology leader that serves the defense, intelligence, civil and health markets. Its core capabilities include providing solutions in the fields of cybersecurity, data analytics, enterprise IT modernization, operations and logistics, sensors, collection and phenomenology, software development and systems engineering.

Apart from a discounted PEG and P/E, Leidos Holdings currently has a Zacks Rank #2 and a Value Score of A. Leidos Holdings has a long-term historical growth rate of 11.2%.

Itron: Headquartered in Liberty Lake, WA, Itron is a technology company and one of the leading global suppliers of a wide range of standard, advanced, and smart meters and meter communication systems, including networks and communication modules, software, devices, sensors, data analytics and services.

Apart from a discounted PEG and P/E, Itron currently has a Zacks Rank #2 and a Value Score of B. Itron has a long-term expected growth rate of 23%.

Integer Holdings: Plano, TX-based Integer Holdings manufactures and develops medical devices and components primarily for original equipment manufacturers. Integer Holdings currently serves the cardiac, neuromodulation, orthopedics, vascular, advanced surgical and portable medical markets.

Integer Holdings currently holds a Zacks Rank #2 and has a Value Score of B. It also has an impressive five-year expected growth rate of 15.8%.

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.

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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.

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