5 Attractive PEG-Based GARP Stocks for Investors
In a market dealing with external shocks, value investing is fast gaining popularity. The success of value investors like Warren Buffett underscores this. Buffett and his business partner, Charlie Munger, managed to register more than 20% CAGR for Berkshire Hathaway from 1965 through 2022. This compares favorably with a 10% rise of the S&P 500 Index during the same period.
Several other stocks, which have surged significantly in the recent past, have shown the overwhelming success of this pure-play investment strategy. Here, we discuss five such stocks — Devon Energy DVN, Marathon Oil Corp. MRO, Everest Group EG, Stride, Inc. LRN and American Woodmark Corporation AMWD.
More on Value Investing
While searching for a suitable investment option, value investors with a varied risk appetite are unlikely to consider the price/earnings to growth (PEG) ratio among several other popular metrics like price/earnings (P/E), price/sales and price/book value (P/B).
This is because they often find this ratio complicated, considering the limitations in calculating a stock's future earnings growth potential. Yardsticks, such as dividend yield, P/E or P/B, are commonly used to single out stocks trading at a discount.
However, while not taking into account the growth potential of a stock, these ratios might end up convincing us to invest in stocks that are at a discount just because of their poor show. This might often lead to “value traps” — a situation when these value picks start to underperform over the long run as the temporary problems, which, once pulled down the share price, turn out to be persistent.
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 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 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 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:
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.
Here are five out of the eight stocks that qualified the screening:
Devon Energy: Based in OK, Devon Energy is an independent energy company engaged primarily in the exploration, development and production of oil and natural gas. The company’s oil and gas operations are mainlyconcentrated in the onshore areas of North America, primarily in the United States.
Devon Energy currently holds a Zacks Rank #2 and has a Value Score of A. Devon Energy also has an impressive five-year historical growth rate of 59.8%.
Marathon Oil: Houston, TX-based Marathon Oil is a leading oil and natural gas exploration and production (“E&P”) company with operations in the United States and Africa.Marathon’s oil and gas operations are mainly concentrated in the United States (primarily Oklahoma, Eagle Ford, Bakken and Northern Delaware) and Equatorial Guinea.
Apart from a discounted PEG and P/E, MRO currently has a Zacks Rank #2 and a Value Score of B. Marathon Oil has a long-term expected growth rate of 19.8%.
Everest Group: Based in Warren, NJ, Everest Group, a Delaware reinsurance company and a direct subsidiary of Holdings, is a property and casualty insurer and reinsurer in all states, the District of Columbia, Puerto Rico and Guam. The company’s business strategy is to sustain its leadership position within targeted reinsurance and insurance markets, provide effective management throughout the property and casualty underwriting cycle and achieve an attractive return for its shareholders.
Everest Group has an impressive long-term expected growth rate of 35.8%. Everest Group currently has a Value Score of A and a Zacks Rank of 2.
Stride: It is a technology-based education service company, which provides proprietary and third-party online curriculum, software systems and educational services to facilitate individualized learning for students primarily in kindergarten through 12th grade (K-12) in the United States and internationally. Its technology-based products and services enable clients to attract, enroll, educate, track progress and support students.
Apart from a discounted PEG and P/E, Stride currently has a Zacks Rank #1 and a Value Score of A. Stride has a long-term historical growth rate of 33.5%.
American Woodmark: The company manufactures and distributes kitchen, bath, office, home organization, and hardware products for remodeling and new home construction markets in the United States. American Woodmark offers made-to-order and cash-and-carry products. It also provides turnkey installation services to its direct builder customers through a network of eight service centers.
American Woodmark has a long-term expected growth rate of 13%. AMWD currently carries a Zacks Rank of 1 and has a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
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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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Devon Energy Corporation (DVN) : Free Stock Analysis Report
Marathon Oil Corporation (MRO) : Free Stock Analysis Report
American Woodmark Corporation (AMWD) : Free Stock Analysis Report
Stride, Inc. (LRN) : Free Stock Analysis Report
Everest Group, Ltd. (EG) : Free Stock Analysis Report
