The new year has been turbulent so far for the equity market, with geopolitical tensions and trade policies playing a significant role in shaping investor sentiment. Trump's tariff policies have not only reignited trade conflicts with China but also resulted in retaliatory measures from the European Union. This has increased concerns over global supply chains and corporate earnings. Further, the Federal Reserve’s decision to hold interest rates steady, despite earlier expectations of a cut, has added to market uncertainty. Fed’s cautious approach suggests that inflationary pressure might still be at play, limiting its flexibility in easing monetary policy.
In such a situation, investments always need to be prudently hedged in order to limit losses related to external shocks. A question that often arises is whether one should resort to a value strategy that seeks discounted stocks or opt for growth investing in times of extreme market instability. The investing track of the Oracle of Omaha over the past few decades and his gradual shift from being a pure-play value investor to a GARP (growth at a reasonable price) investor might give us all the answers.
Several stocks, which have surged significantly in the recent past, show an overwhelming success of this hybrid investing strategy over pure-play value and growth investments. Here, we will discuss the success of four such stocks. These are Gilead Sciences GILD, Exelixis EXEL, Synchrony Financial SYF and Molson Coors TAP.
More on GARP
The GARP theory enables strategic mingling of growth and value-investing principles, which gives us a hybrid strategy by utilizing the best features of both. What GARPers look for is whether or not the stocks are somewhat undervalued and have solid sustainable growth potential (Investopedia).
PEG Ratio and GARP
GARP investing gives priority to one of the popular value metrics — the price/earnings growth (PEG) ratio. Although it is categorized under value investing, this strategy follows the principles of both growth and value investing.
The PEG ratio is defined as (Price/ Earnings)/Earnings Growth Rate
It relates stocks’ P/E ratio with their future earnings growth rates.
While P/E alone gives an idea of stocks that are trading at a discount, PEG, while adding the growth element to it, helps identify stocks with solid future potential.
A lower PEG ratio, preferably less than 1, is always better for GARP investors.
Say for example, if a stock's P/E ratio is 10 and the expected long-term growth rate is 15%, the company's PEG will come down to 0.66, a ratio indicating both undervaluation and future growth potential.
Unfortunately, this ratio is often neglected due to investors' limitations in calculating the future earnings growth rate of a stock.
There are some drawbacks to using the PEG ratio though. It does not 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 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 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 four out of the 14 stocks that qualified the screening:
Gilead Sciences: Headquartered in Foster City, CA, Gilead Sciences is a pioneer in developing drugs for the treatment of human immunodeficiency virus (HIV). The company’s broad portfolio includes drugs for liver diseases, hematology/oncology diseases and inflammation/respiratory diseases.
The stock can be an impressive value investment pick with its Zacks Rank #2 and a Value Score of B. Apart from a discounted PEG and P/E, GILD also has an impressive long-term expected earnings growth rate of 19.5%.
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. Exelixis’ lead drug, Cabometyx, continues to be the leading tyrosine kinase inhibitor for the treatment of renal cell carcinoma.
The stock can also be an impressive investment pick with its Zacks Rank #2 and a Value Score of B. Apart from a discounted PEG and P/E, the stock also has a solid long-term expected growth rate of 15.2%.
Synchrony Financial: As one of the nation’s premier consumer financial services companies, Synchrony Financial offers a wide range of credit products through a diverse group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and health and wellness providers.
Apart from a discounted PEG and P/E, the stock has a Value Score of A and holds a Zacks Rank #2. The stock also has a 13.1% long-term historical earnings growth rate.
Molson Coors: This is a global manufacturer and seller of beer and other beverage products with an impressive diverse portfolio of owned and partner brands. These core brands include Blue Moon, Miller Lite, CoorsBanquet, Coors Light, Molson Canadian, Carling and Ozujsko.
The stock can be an impressive value investment pick with its Zacks Rank #1 and a Value Score of A. Apart from a discounted PEG and P/E, the stock also has an impressive long-term expected earnings growth rate of 6.3%.
You can see the complete list of today’s Zacks #1 Rank stocks here.
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.
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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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