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 19.8% CAGR for Berkshire Hathaway from 1965 through 2023. This compares favorably with a 10.2% 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 — Hilton Grand Vacations (HGV Quick QuoteHGV - Free Report) , Tenet Healthcare (THC Quick QuoteTHC - Free Report) , Universal Health Services (UHS Quick QuoteUHS - Free Report) , Popular, Inc. (BPOP Quick QuoteBPOP - Free Report) and B2Gold Corp (BTG Quick QuoteBTG - 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 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 purposes)

Zacks Rank #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 nine stocks that qualified the screening:

Hilton Grand Vacations: It is recognized as a leading global timeshare company and is the exclusive vacation ownership partner of Hilton. With headquarters in Orlando, Florida, Hilton Grand Vacations develops, markets and operates a system of brand-name, high-quality vacation ownership resorts in select vacation destinations.

Hilton Grand Vacations currently sports a Zacks Rank #1 and has a Value Score of A. Hilton Grand Vacations also has an impressive five-year historical growth rate of 8.8%.

Tenet Healthcare: Headquartered in Dallas, TX, Tenet Healthcare is an investor-owned healthcare services company that owns and operates general hospitals and related healthcare facilities for urban and rural communities in numerous states. Tenet Healthcare and its subsidiaries provide healthcare services, primarily through general hospitals and related healthcare facilities.

Apart from a discounted PEG and P/E, Tenet Healthcare currently has a Zacks Rank #1 and a Value Score of A. Tenet Healthcare has a long-term historical growth rate of 18.3%.

Universal Health: King of Prussia, PA-based Universal Health owns and operates (through its subsidiaries) acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers and radiation oncology centers. The company’s range of services includes general and specialty surgery, internal medicine, obstetrics, emergency room care, radiology, oncology, diagnostic care, coronary care, pediatric services, pharmacy services and/or behavioral health services.

Apart from a discounted PEG and P/E, Universal Health currently has a Zacks Rank #1 and a Value Score of A. Universal Health has a long-term expected growth rate of 16.3%.

Popular: Through its subsidiaries, the company provides various retail, mortgage and commercial banking products and services in Puerto Rico, the United States and the British Virgin Islands. Banco Popular de Puerto Rico, Popular’s principal subsidiary, provides retail, mortgage and commercial banking services in Puerto Rico and the U.S. Virgin Islands. Popular also offers auto and equipment leasing and financing, investment banking, broker-dealer and insurance services through specialized subsidiaries in Puerto Rico.

Popular has an impressive long-term expected growth rate of 14.4%. Popular currently has a Value Score of A and a Zacks Rank of 1. You can see the complete list of today’s Zacks #1 Rank stocks here.

B2Gold: Vancouver-based B2Gold is a gold producer with three operational mines (one each in Mali, Namibia, Philippines). The company also has a portfolio of other evaluation and exploration assets in Mali, Burkina Faso, Colombia, Namibia and Finland.

Apart from a discounted PEG and P/E, B2Gold currently has a Zacks Rank #1 and a Value Score of A. B2Gold has a long-term historical growth rate of 23.5%.

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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