5 Impressive PEG Stocks For Value Investors

There are numerous financial metrics, which can prove to be quite effective in terms of measuring the financial health of a company. However, value investors with a varied risk appetite more often than not confine themselves to a limited number of popular and easy-to-compute metrics such as price/earnings (P/E), price/sales (P/S) or price/book value (P/B).

Needless to say, many important yardsticks, which are unique in terms of judging a company’s future prospects, are disregarded. The price/earnings to growth (PEG) ratio is one such less-popular investment option, which investors often find difficult considering the limitations in calculating the future earnings growth potential of a stock.

We note that P/E, P/B or P/S can easily measure whether a stock is at present trading at a discount. However, these fail to give any idea about the future growth trend of a stock. In such a case, even if you buy a stock at less than its fair value, you might still end up paying more.

The PEG ratio on the other hand, with the term ‘growth’ within it, is perfect for accurately calculating the future earnings (EPS) growth rate of a company.

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 for the first three years at a very high growth rate followed by a sustainable but lower growth rate in the long term.

Nonetheless, 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) (whether market conditions are good or bad, stocks with a Zacks Rank #1 (Strong 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 (Buy) offer the best upside potential.

Here are 5 of the 19 stocks that qualified after the screening:

US Foods Holding Corp. (NYSE:USFD) : This renowned food company and foodservice distributor currently carries a Zacks Rank #2 and a Value Style Score ‘A’. The company also has an impressive expected five-year growth rate of 18.6%.

Cooper-Standard Holdings Inc. (NYSE:CPS) : This company is a global supplier of systems and components for the automotive industry. It can be an impressive value investment pick with its Zacks Rank #1 and Value Style Score ‘A’. Apart from a discounted PEG and P/E, the stock also has an impressive expected five-year growth rate of 6.3%.

Berry Plastics Group, Inc. (NYSE:BERY) : Berry Plastics is a manufacturer and distributer of plastic consumer packaging and engineered materials in the U.S. and outside. This Zacks Rank #1 and Value Style Score ‘B’ company also has an impressive expected five-year growth rate of 20.2%.

ARRIS International plc (NASDAQ:ARRS) : This major player in the field of entertainment and communications technology can also be an impressive value investment pick with its Zacks Rank #1 and Value Style Score ‘B’.

Argo Group International Holdings, Ltd. (NASDAQ:AGII) : Argo Group International is an international underwriter of specialty insurance and reinsurance products in the property and casualty market. The company currently sports a Zacks Rank #1 and a Value Style Score ‘B’. The company has delivered an earnings surprise of 36.67% in its last reported quarter with a trailing 12-month earnings beat of 13.97%.

Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and backtesting software.

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.

Click here to sign up for a free trial to the Research Wizard today.

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.

Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »