In a market dealing with external shocks, value investing is fast gaining popularity. The success of value investors like Warren Buffett underscores this. Buffett and his business partner, Charlie Munger, managed to register more than 20% CAGR for Berkshire Hathaway from 1965 through 2022. This compares favorably with a 10% rise of the S&P 500 Index during the same period.

Several stocks, which have surged significantly in the recent past, have shown the overwhelming success of this pure-play investment strategy. Here, we discuss five such stocks — Royal Caribbean Cruises (RCL Quick QuoteRCL - Free Report) , General Motors Company (GM Quick QuoteGM - Free Report) , American Airlines (AAL Quick QuoteAAL - Free Report) , Synchrony Financial (SYF Quick QuoteSYF - Free Report) and Textron Inc. (TXT Quick QuoteTXT - Free Report) .

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While searching for a suitable investment option, value investors with a varied risk appetite are unlikely to consider the price/earnings to growth (PEG) ratio among several other popular metrics like price/earnings (P/E), price/sales and price/book value (P/B).

This is because they often find this ratio complicated, considering the limitations in calculating a stock's future earnings growth potential. Yardsticks, such as dividend yield, P/E or P/B, are commonly used to single out stocks trading at a discount.

However, while not taking into account the growth potential of a stock, these ratios 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. 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.

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 11 stocks that qualified the screening:

Royal Caribbean: Based in Miami, Royal Caribbean is a cruise company. It owns and operates three global brands — Royal Caribbean International, Celebrity Cruises and Azamara Club Cruises. Additionally, it has a 50% investment in a joint venture with TUI AG, which operates the brand TUI Cruises. The company’s cruise brands primarily serve the contemporary, premium and deluxe segments of the cruise vacation industry, which also includes the budget and luxury segments.

Royal Caribbean currently sports a Zacks Rank #1 and has a Value Score of A. Royal Caribbean also has an impressive five-year expected growth rate of 26.7%. You can see the complete list of today’s Zacks #1 Rank stocks here.

General Motors: It held the largest share of the U.S. auto market at 16.2% in 2023. Headquartered in Detroit, the auto giant is stepping up efforts to embrace an electric future and gain a strong foothold in the fast-growing market. The automaker plans to roll out 30 fresh electric vehicle models by 2025-end. 

Apart from a discounted PEG and P/E, GM currently has a Zacks Rank #2 and a Value Score of A. General Motors has a long-term expected growth rate of 9%.

American Airlines: The company was formed following the December 2013 merger between AMR (American Airlines' parent group) and U.S. Airways. The merger resulted in the formation of the largest airline internationally. American Airlines Group is headquartered in Fort Worth, TX. This Delaware corporation’s wholly-owned subsidiaries are American Airlines, Envoy Aviation Group, PSA Airlines and Piedmont Airlines. The company’s primary business is to provide passenger and cargo services.

American Airlines has an impressive long-term expected growth rate of 49.5%. AAL currently has a Value Score of A and a Zacks Rank of 2.

Synchrony Financial: Being one of the nation’s premier consumer financial services companies, it offers a wide range of credit products through a diverse group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and health and wellness providers. Synchrony Financial focuses on generating financial flexibility for its customers by offering private label credit cards, Dual Card, and general purpose co-branded credit cards, promotional financing and installment lending, and loyalty programs. 

Apart from a discounted PEG and P/E, SYF currently has a Zacks Rank #2 and a Value Score of A. Synchrony Financial has a long-term historical growth rate of 7.9%.

Textron: It is a global multi-industry company that manufactures aircraft, automotive engine components and industrial tools. It also offers solutions and services for aircraft, fastening systems, and industrial products and components. Its products include commercial and military helicopters, light- and mid-size business jets, plastic fuel tanks, automotive trim products, golf carts and utility vehicles, turf-car equipment, industrial pumps and gears.

Apart from a discounted PEG and P/E, Textron currently has a Zacks Rank #1 and a Value Score of B. Textron has a long-term historical growth rate of 11.9%.

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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