5 Dirt Cheap PEG Stocks that Value Investors Can Bet On
Zacks Equity Research
Updated
The idea of value investing is gaining popularity with each passing day, thanks to the winning trail of the world’s most successful value investor Warren Buffett. As per data provided by a latest Forbes article, shares of Warren Buffett’s conglomerate Berkshire Hathaway 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. This once again underscores the importance of value investing as the most tempting strategy to bet on even amid uncertain market conditions.
Traditionally, the simplest method to decide whether a stock is overvalued or discounted is to determine its price-to-earnings ratio (P/E) and compare it with the P/E of the market or peer group. If you find the stock’s P/E is higher than that of the market, you can conclude that it is an expensive bid and vice versa.
However, the problem arises when a stock apparently with an attractively lower P/E faces a dearth of catalysts to propel future growth. In such a case, if you buy the stock depending solely on its lower P/E, you might still end up paying more on the risk that the stock may falter soon. To avoid such value traps, Warren Buffett advises investors to focus on the earnings growth potential of a stock while judging the intrinsic value. And here lies the importance of a not-so-popular 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.
Unfortunately, this ratio is often neglected due to investors’ limitation to calculate the future earnings growth rate 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), 2 (Buy) or 3 (Hold) (whether good market conditions or bad, stocks with a Zacks Rank #1 and #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 offer the best upside potential.
Here are five stocks that qualified the screening:
Tailored Brands, Inc. TLRD: 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 #1 and Value Style Score of 'A'. Apart from a discounted PEG and P/E, the stock also has an impressive expected growth rate of 14.5% for the next fiscal.
Acushnet Holdings Corp. GOLF: Acushnet Holdings is a worldwide developer, manufacturer and distributor of golf products. This company has a Value Style Score of 'B' and an impressive long-term earnings growth rate of 10%. The stock carries a Zacks Rank #3. You can see the complete list of today's Zacks #1 Rank stocks here.
Teck Resources Limited TECK: This popular name in the field of natural resources with business spreading in the Americas, the Asia Pacific, and Europe currently holds a Zacks Rank #1 and has a Value Style score ‘B’. The company also has an impressive growth rate of 162.2% for the next year.
Ternium S.A. TX: This is a renowned manufacture of various steel products in Mexico, Argentina, Bolivia, Chile, Paraguay, Uruguay, the U.S., Central America, Colombia and internationally. It operates through two segments, Steel and Mining. This stock can be an impressive value investment pick with its Zacks Rank #3 and a Value Style Score of ‘A’. Apart from a discounted PEG and P/E, the stock also has an impressive expected five-year growth rate of 19.2%.
Embraer S.A. ERJ: This company is a provider of aircraft and systems in Brazil, North America, Latin America, the Asia Pacific, Europe, and internationally. It operates through Commercial Aviation, Executive Jets, Defense & Security, and Other Related Businesses segments. This Zacks Rank #2 company has a Value Style Score of ‘A’ also has an impressive expected growth rate of 30.3% for the next fiscal. It delivered an earnings surprise of 59.3% in its last reported quarter.
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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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