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5 Finest Value Stocks Based on PEG Ratio

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·6 min read
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  • PAG
  • ATCO-PI
  • CAR
  • LNVGY

Thanks to the almost two-year long pandemic-driven market selloffs and the latest highly-contagious Omicron variant of COVID-19 increasing uncertainties about the global financial outlook, a number of growth stocks have moved into the undervalued territory. However, thanks to the ongoing extensive rollout of vaccines across nations as well as the gradual easing of the economic fear factor surrounding the pandemic, market watchers believe that a steep rebound is in the cards for these beaten-down stocks anytime soon.

At this point in time, with many fundamentally great stocks now at their lows, investors are searching for a suitable investment option. They may currently resort to value investment to capitalize on the long-term potential of these stocks. Here we will discuss the success of five such stocks. These include Avis Budget Group CAR, ModivCare Inc. MODV, Lenovo Group Limited LNVGY, Penske Automotive PAG and Atlas Corp. ATCO.

A Peek into Value Investing

While searching for a suitable investment option, value investors with varied risk appetite are unlikely to consider price/earnings to growth (PEG) ratio among a number of other popular metrics like price/earnings (P/E), price/sales (P/S) or price/book value (P/B).

This is because they often find this ratio complicated, considering the limitations in calculating the future earnings growth potential of a stock. Yardsticks, such as dividend yield, P/E or P/B, are most commonly used to single out stocks trading at a discount.

However, these ratios, which do not take into account the future growth potential of a stock, 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 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 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 10 stocks that qualified the screening:

Avis Budget Group: Headquartered in Parsippany, N.J., Avis Budget Group operates as a leading vehicle rental operator in North America, Europe and Australasia. The company is a leading global provider of mobility solutions through its three most recognized brands — Avis, Budget and Zipcar. The company has licensees in approximately 175 countries throughout the world. Avis Budget Group has an impressive long-term historical growth rate of 18.8%. The stock carries a Zacks Rank #1 and has a Value Score of B. You can see the complete list of today’s Zacks #1 Rank stocks here.

ModivCare Inc.: This is a technology-enabled healthcare services company, providing a suite of integrated supportive care solutions for public and private payors and patients. ModivCare offers non-emergency medical transportation services for Medicaid or Medicare eligible members, whose limited mobility or financial resources hinder their ability to access necessary healthcare and social services.  Apart from a discounted PEG and P/E, ModivCare has a Value Score of B and holds a Zacks Rank #1. The company also has an impressive long-term historical growth rate of 30.4%.

Lenovo Group Limited: Lenovo is a Fortune Global 500 company serving customers in 180 markets around the world with revenues of $60 billion. The company develops, manufactures, and markets technology products and services. It operates through Intelligent Devices Group and Data Center Group segments. Apart from a discounted PEG and P/E, Lenovo holds a Zacks Rank #2 and has a Value Score of A.

Penske Automotive: Based in Bloomfield Hills, MI, Penske Automotive engages in the operation of automotive and commercial truck dealerships in the United States, Canada and Western Europe. Penske Automotive also distributes commercial vehicles, diesel engines, gas engines, power systems and related parts and services principally in Australia and New Zealand. The company currently holds a Zacks Rank #2 and has a Value Score of A. The company also has an impressive expected five-year growth rate of 20%.

Atlas Corp.: This is a global asset management company, differentiated by its position as a best-in class owner and operator with a focus on deploying capital to create sustainable shareholder value. Atlas, through its subsidiaries, operates as an independent charter owner and manager of containerships. Atlas holds a Zacks Rank #1 and has a Value Score of A. The stock also has an impressive long-term expected earnings growth rate of 27.9%.

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.

Click here to sign up for a free trial to the Research Wizard today.

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.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Avis Budget Group, Inc. (CAR) : Free Stock Analysis Report
 
Penske Automotive Group, Inc. (PAG) : Free Stock Analysis Report
 
Lenovo Group Ltd. (LNVGY) : Free Stock Analysis Report
 
Atlas Corp. (ATCO) : Free Stock Analysis Report
 
ModivCare Inc. (MODV) : Free Stock Analysis Report
 
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