5 Best PEG Stocks For A Lucrative Value Investing

Value investors with varied risk appetite are most unlikely to hit upon the price/earnings to growth (PEG) ratio as an investment option among a number of other popular metrics like price/earnings (P/E), price/sales 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.

But, in a year full of volatility, 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.

But will a discount based on these multiples ensure success? What if there is a dearth of catalysts to propel growth even though the stock is at a discount right now? 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 lower PEG ratio is always better for value investors.

While P/E 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 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 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 (Strong Buy) or #2 (Buy) 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 or 2 offer the best upside potential.

Here are 5 of the 18 stocks that qualified the screening:

AngloGold Ashanti Ltd. (NYSE:AU) : This gold mining and exploration company currently carries a Zacks Rank #1 and a Value Style Score ‘B’. The company also has an impressive expected five-year growth rate of 27.6%.

Biogen Inc. (NASDAQ:BIIB) : This popular name in the biopharma market works on innovative therapies in the field of serious neurological, autoimmune, and rare diseases. The company can be an impressive value investment pick with its Zacks Rank #2 and Value Style Score ‘B’. Apart from a discounted PEG and P/E, the stock also has an impressive expected five-year growth rate of 10.2%.

QUALCOMM Incorporated (NASDAQ:QCOM) : QUALCOMM is a digital communications products and services company with business spread out in China, South Korea, Taiwan, and the U.S. This Zacks Rank #2 and Value Style Score ‘B’ company also has an impressive expected five-year growth rate of 10.8%.

Tallgrass Energy GP, LP (NYSE:TEGP) : This provider of crude oil transportation to customers in Wyoming and Colorado can also be an impressive value investment pick with its Zacks Rank #1 and Value Style Score ‘A’.

Steel Dynamics Inc. (NASDAQ:STLD) : This manufacturer and seller of steel products in the U.S. holds a Zacks Rank #2 and a Value Style Score ‘A’. The company has delivered an earnings surprise of 3.57% in its last reported quarter with a trailing 12-month earnings beat of 12.29%.

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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.

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