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5 Best GARP Stocks Based on Discounted PEG Ratio

In the equity market, investments need to be prudently hedged to overcome uncertainties and limit losses related to external shocks. A question that arises often 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.

Per the GARP theory, the strategic mingling of growth and value-investing principles gives us a hybrid strategy, offering an ideal investment 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).

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 five such stocks. These include Stellantis STLA, Suzano SUZ, Baidu BIDU, Tencent Music Entertainment Group TME and Delek US Holdings DK.

A Few More Words on 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 the stocks’ P/E ratio with the 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 to calculate 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 Value Style Score of A or B, when combined with a Zacks Rank #1, 2 or 3 (Hold), offer the best upside potential.

Here are the five stocks that qualified the screening:

Stellantis: Stellantis is one of the world’s leading automakers and a mobility provider. Its products and services include Abarth, Alfa Romeo, Chrysler, Citroën, Dodge, DS Automobiles, Fiat, Jeep, Lancia, Maserati, Opel, Peugeot, Ram, Vauxhall, Free2move and Leasys.

Stellantis 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, Stellantis also has an impressive long-term expected growth rate of 37.7%.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Suzano: This is a forestry-based publicly-held company, controlled by Suzano Holding and belonging to Group Suzano. Suzano produces and sells eucalyptus pulp and paper products in Brazil and internationally. It operates through Pulp and Paper segments. The company offers coated and uncoated printing and writing papers, paperboards, tissue papers, market and fluff pulps, and lignin and its byproducts.

Suzano stock can also be an impressive value investment pick with its Zacks Rank #1 and Value Score of A. Apart from a discounted PEG and P/E, Suzano has a solid long-term expected growth rate of 10.5%.

Baidu: Baidu is a leading AI company in China with a strong Internet foundation.It operates through Baidu Core and iQIYI segments. The company offers Baidu App to access search, feed, and other services using mobile devices; Baidu Search to access its search and other services; Baidu Feed that provides users with a personalized timeline based on their demographics and interests; and Haokan, a short video app.

Baidu has an impressive growth rate of 20.9% for the next five years. The stock currently has a Value Score of B and carries a Zacks Rank #2.

Tencent Music Entertainment: Tencent Music Entertainment is the leading online music and audio entertainment platform in China. It operates music apps like QQ Music, Kugou Music, Kuwo Music and WeSing.TME's platform comprises online music, online audio, online karaoke, music-centric live streaming and online concert services, enabling music fans to discover, listen, sing, watch, perform, and socialize around music.

Tencent Music Entertainment carries a Zacks Rank of 2 and has a Value Score of A. Tencent Music Entertainment has an impressive long-term historical growth rate of 17.9%.

Delek US Holdings: Brentwood, TN-based Delek US Holdings is an independent refiner, transporter and marketer of petroleum products. The company’s operations are organized into three reportable segments: Refining, Logistics and Retail.

Delek US Holdings can also be an impressive value investment pick with its Zacks Rank #2 and a Value Score of A. Apart from a discounted PEG and P/E, the stock also has a solid long-term expected growth rate of 15.4%.

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.

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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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Baidu, Inc. (BIDU) : Free Stock Analysis Report
 
Delek US Holdings, Inc. (DK) : Free Stock Analysis Report
 
Tencent Music Entertainment Group Sponsored ADR (TME) : Free Stock Analysis Report
 
Suzano S.A. Sponsored ADR (SUZ) : Free Stock Analysis Report
 
Stellantis N.V. (STLA) : Free Stock Analysis Report
 
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