Going by the Oracle of Omaha’s success story, value investment is one of the most tempting strategies to bet on even amid uncertain market conditions. As per data provided by a Forbes article, shares of Berkshire Hathaway, owned by Warren Buffett, increased 20% in 2016, boosting the Oracle of Omaha’s personal fortune by $12.3 billion (more than any other billionaire in the U.S.) to $74.2 billion.

While searching for a suitable value investment option, investors are unlikely to consider price/earnings to growth (PEG) ratio among a number of other popular value 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.

However, at a time when volatility strikes every second day, it is pointless to ponder on methods, which don’t consider a stock’s future growth rate while calculating its intrinsic merit. Yardsticks such as dividend yield, P/E or P/B are most commonly used to single out whether a stock is 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 drove the share price down 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 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 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 of the 27 stocks that qualified the screening:

The Chemours Company (CC Quick QuoteCC - Free Report) : This is a leading player in the field of titanium technologies, fluoroproducts and chemical solutions, catering to a wide range of industries with market-defining products, application expertise and chemistry-based innovations. The company has an impressive expected five-year growth rate of 15.5%. The stock currently has a Value Style Score of ‘B’ and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

ArcelorMittal (MT Quick QuoteMT - Free Report) : Based in Luxembourg, ArcelorMittal is the world’s leading steel and mining company. With a presence in more than 60 countries, it operates a balanced portfolio of cost competitive steel plants across both developed and developing nations. It is the leader in all the main sectors – automotive, household appliances, packaging and construction. With a Zacks Rank #1 and a Value Style Score of ‘A’, this stock can prove to be a solid value investment pick at present. It also has an impressive expected growth rate of 108.3% for the current fiscal.

Boise Cascade Company (BCC Quick QuoteBCC - Free Report) ) is one of the largest producers of engineered wood products and plywood in North America and a U.S. wholesale distributor of building products. Apart from a discounted PEG and P/E, the stock holds a Zacks Rank #1 and a Value Style Score of ‘A’.

Tailored Brands, Inc. ): This is a men’s specialty apparel retailer in the U.S. and Canada. The brands include Men's Wearhouse, Jos. A. Bank, Joseph Abboud, Moores Clothing for Men and K&G Fashion Superstores.  The stock can also be an impressive value investment pick with its Zacks Rank #2 and Value Style Score 'A'. Apart from a discounted PEG and P/E, the stock also has an impressive long-term expected growth rate of 16.5%.

Lantheus Holdings, Inc. : The company develops, manufactures, and commercializes diagnostic medical imaging agents and products for the diagnosis and treatment of cardiovascular and other diseases worldwide. Apart from a Zacks Rank #1 and Value Style Score 'B', the company also has an impressive expected growth rate of 28.5% for the current fiscal.

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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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