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. In this article, we discuss how the price/earnings to growth (PEG) ratio can become an efficient yardstick in picking the best value stocks.

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 — Genpact Limited (G Quick QuoteG - Free Report) , MPLX LP (MPLX Quick QuoteMPLX - Free Report) , Exelixis, Inc. (EXEL Quick QuoteEXEL - Free Report) , Paramount Global (PARA Quick QuotePARA - Free Report) and H&R Block (HRB Quick QuoteHRB - Free Report) .

More on Value Investing

While searching for a suitable investment option, value investors with a varied risk appetite are unlikely to consider the 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.

PEG Ratio at a Glance

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. 

Our Picks

Here are five out of the 20 stocks that qualified the screening:

Genpact: Hamilton, Bermuda-based Genpact manages business processes for companies around the world. The company combines process expertise, information technology and analytical capabilities with operational insight and experience in diverse industries to provide a wide range of services using its global delivery platform.

Genpact currently has a Zacks Rank #2 and a Value Score of A. Genpact also has an impressive five-year historical growth rate of 10%.

MPLX: Findlay, OH-based MPLX LP is a master limited partnership engaged in providing a wide range of midstream energy services, including fuel distribution solutions. Marathon Petroleum holds around 64% of MPLX's outstanding common units. Apart from oil and natural gas gathering systems, the partnership's midstream assets comprise transportation pipelines for crude, natural gas and refined petroleum products.

Apart from a discounted PEG and P/E, MPLX currently has a Zacks Rank #1 and a Value Score of B. MPLX has a long-term historical growth rate of 14.8%.

Exelixis: Alameda, CA-based Exelixis is an oncology-focused biotechnology company that primarily focuses on the discovery, development and commercialization of new drugs for the treatment of difficult-to-treat cancers. The company is leveraging its investments, expertise and strategic partnerships to target an expanding range of tumor types and indications with its clinically differentiated pipeline of small molecules, antibody-drug conjugates and other biotherapeutics.

Apart from a discounted PEG and P/E, Exelixis currently has a Zacks Rank #2 and a Value Score of B. Exelixis has a long-term expected growth rate of 34.1%.

Paramount Global: New York-based Paramount Global is the erstwhile ViacomCBS that emerged from the combination of Viacom and CBS Corporation in 2019. The company is a global media, streaming and entertainment provider offering content through well-known brands, including CBS, Showtime Networks, Paramount Pictures, Nickelodeon, MTV, Comedy Central, BET, Paramount+ and Pluto TV. It also operates Paramount Pictures.

Paramount Global has an impressive long-term expected growth rate of 11.6%. Popular currently has a Value Score of A and a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.

H&R Block: It is a leading provider of tax preparation services. The company provides assisted income tax return preparation, do-it-yourself (DIY) tax solutions and other products and services associated with income tax return preparation in the United States, Canada and Australia.

Apart from a discounted PEG and P/E, H&R Block currently has a Zacks Rank #1 and a Value Score of B. H&R Block has a long-term historical growth rate of 15.5%.

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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