With smart investment becoming the buzzword in today’s investment world, millennials are more inclined toward hybrid investment patterns rather than traditional pure play theories like value or growth.
The logic behind this is the effectiveness of a mixed investment strategy as value or growth investing approaches come with their own share of pitfalls. A pure play value investor misses the chance of betting on stocks that have bright long-term prospects. The same way, growth investors often end up investing in expensive stocks. In other words, to make a long-term investment more effective, the principles of both value and growth strategies need to be combined.
The quest for a mixed investment strategy led to the introduction of the GARP (growth at a reasonable price) approach. What GARPers look for is whether the stocks are somewhat undervalued and have solid sustainable growth potential (Investopedia).
One of the fundamental metrics for finding GARP is the price/earnings growth ratio (PEG). 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 future earnings growth rate.
While P/E alone only gives the idea of stocks, which are trading at a discount, PEG while adding the GROWTH element to it, helps to find those stocks that have 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 expected long-term growth rate is 15%, the company's PEG will come down to 0.66, a ratio which indicates both undervaluation and future growth potential.
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 does not consider the very common situation of changing growth rates such as the forecast of the first three years at 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 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 of the 20 stocks that qualified the screening:
Hologic, Inc. HOLX: Hologic develops, manufactures, and supplies diagnostics, medical imaging systems and surgical products, which cater to the healthcare needs of women. The company is focused on mammography systems for breast examination and osteoporosis assessment. The stock can be an impressive value investment pick with its Zacks Rank #2 and Value Score of B. Apart from a discounted PEG and P/E, the stock also has an impressive long-term expected growth rate of 8.9%.
Molina Healthcare, Inc. MOH: This is a specialty biopharmaceutical company focusing on areas of sleep and hematology/oncology. The 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, the stock also has an impressive long-term historical growth rate of 58.1%. You can see the complete list of today's Zacks #1 Rank stocks here.
Terex Corporation TEX is a global manufacturer of aerial work platforms, materials processing machinery and cranes. It designs, build and support products used in construction, maintenance, manufacturing, energy, minerals and materials management applications. The company has an impressive long-term growth rate of 8.8%. The stock currently has a Value Score of B and a Zacks Rank #2.
AngloGold Ashanti Limited AU: It operates as a gold mining company. It also produces silver, uranium and sulphuric acid and dóre bars. Apart from a discounted PEG and P/E, the stock has a Value Score of A and holds a Zacks Rank #1.
Oracle Corporation ORCL: This is one of the largest enterprise-grade database, middleware and application software providers. Oracle has expanded its cloud computing operations over the last couple of years. The company offers cloud solutions and services that can be used to build and manage various cloud deployment models. The stock carries a Zacks Rank #2 and has a Value Score of B.
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.
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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Oracle Corporation (ORCL) : Free Stock Analysis Report
Terex Corporation (TEX) : Free Stock Analysis Report
Hologic, Inc. (HOLX) : Free Stock Analysis Report
Molina Healthcare, Inc (MOH) : Free Stock Analysis Report
AngloGold Ashanti Limited (AU) : Free Stock Analysis Report
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