The novel coronavirus outbreak is engulfing one nation after another. As herd immunity without vaccination still seems far off, market watchers are currently unable to provide clear visibility about any sort of economic rebound in the near term.
Meanwhile, policymakers have left no stone unturned to provide an impetus to the market. Fed slashed the benchmark interest rate to nearly zero and quantitative easing program too was announced to increase money supply. President Trump signed economic relief packages to help small businesses, hospitals as well as to boost testing.
Now the big question is which investment strategy can you resort to right now? Some investors have managed to bridge the gap between value and growth with a hybrid strategy of investment called GARP (growth at a reasonable price). Their theory suggests that the principles of both value and growth strategies need to be combined, in order to make a long-term investment more effective. This strategy helps to find out stocks with solid long-term prospects that have become absurdly cheap amid economic woes.
GARP, often known as a special case of value investment, is gaining popularity nowadays. What GARPers look for is whether or not the stocks are somewhat undervalued and have solid sustainable growth potential (Investopedia).
Here lies the importance of a not-so-popular fundamental metric, 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 rate.
While P/E alone only gives an idea of stocks that are trading at a discount, PEG, while adding the growth element to it, helps identify 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 that indicates both undervaluation and future growth potential.
However, the question that often arises is whether or not the market has an adequate number of companies that are growing earnings while trading at reasonable valuations? Going by a CFA Institute Blogby Nicolas Rabener, “on average, 38% of all stocks exhibit a PEG ratio below 1, which is more than enough for security selection.”
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 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 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 28 stocks that qualified the screening:
Conagra Brands CAG) is one of the leading branded food companies in North America. The company offers premium edible products, with continued focus on innovation. The company maintains a highly dynamic product portfolio and incorporates alterations within it per the preference pattern of the end users. The stock can 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 an impressive long-term expected growth rate of 7%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
eBay Inc. EBAY is an online shopping site that allows visitors to browse through available products listed for sale or auction through each company's online storefront. Over the years, the company has evolved from a relatively small community user-based auction site to a worldwide commercial behemoth store.
The stock can also 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 12.4%.
General Mills Inc. GIS is a global manufacturer and marketer of branded consumer foods sold through retail stores. The company also serves the foodservice and commercial baking industries. The company has an impressive long-term historical growth rate of 7.5%. The stock currently has a Value Score of B and carries a Zacks Rank of 2.
DaVita Inc. DVA is a leading provider of dialysis services in the United States to patients suffering from chronic kidney failure, also known as end stage renal disease (ESRD). Apart from a discounted PEG and P/E, the stock has a Value Score of A and holds a Zacks Rank #2, at present.
QIAGEN N.V. QGEN is one of the world’s leading providers of technologies and products for the separation, purification and handling of nucleic acids DNA/RNA. The company provides innovative technologies and products for pre-analytical sample preparation and molecular diagnostics solutions. Currently, the stock carries a Zacks Rank #1 and has a Value Score of B.
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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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eBay Inc. (EBAY) : Free Stock Analysis Report
DaVita Inc. (DVA) : Free Stock Analysis Report
Conagra Brands Inc. (CAG) : Free Stock Analysis Report
QIAGEN N.V. (QGEN) : Free Stock Analysis Report
General Mills, Inc. (GIS) : Free Stock Analysis Report
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