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4 Discounted PEG Stocks Offering the Best Returns to Value Investors
Urmimala Biswas
5 min read

In This Article:

With the market getting increasingly fickle on external shocks, investors are more focused on finding an investment strategy that emphasizes judging a stock's inherent potential. Needless to say, value investment is gaining popularity day by day.  However, this apparently simple-to-understand investing strategy has historically shown dangerous outcomes a number of times because of people’s oversight of its basics.

Warren Buffett, the popular value investor, believes that proper understanding of the “intrinsic value” of a stock may ease out many problems in this respect. According to him, going by the fundamentals of value investing, as we pick stocks which the market is currently undervaluing, we also need to focus on their earnings growth potential.

Several stocks that have surged significantly in the recent past have shown the overwhelming success of this pure-play investment strategy. Here, we discuss four such stocks — Molson Coors Beverage TAP, BioMarin Pharma BMRN, Devon Energy DVN and Jazz Pharmaceuticals JAZZ.

However, this simple value investment technique has some drawbacks, and not properly understanding the strategy may often lead to “value traps.” In such a situation, these value picks start to underperform over the long run when the temporary problems, which once drove the share price down, turn out to be persistent.

There are many value investment yardsticks, such as dividend yield, P/E or P/B, which are simple and can single out whether a stock is trading at a discount.

However, for investors looking to escape such value traps, it is also vital to determine where the stock will be headed in the next 12 to 24 months. Warren Buffett advises these investors to focus on the earnings growth potential of a stock. This is where the importance of a not-so-popular value investing metric, the PEG ratio, lies.

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 does not consider the 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:

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