5 Lucrative PEG-Based GARP Stocks for Investors
A pure-play value investor often misses the chance to bet on stocks that have bright long-term prospects. In the same way, growth investors often end up investing in expensive stocks. Going by Warren Buffett, these two approaches are joined at the hip.
Accordingly, some investors sought to join the bridge between value and growth with a hybrid strategy of investment. Their theory suggests that to make a long-term investment more effective, the principles of both value and growth strategies need to be combined.
GARP (growth at a reasonable price) investment, often known as a special case of value investment, is gaining popularity. What GARPers look for is whether 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 Perdoceo Education Corporation PRDO, Encompass Health EHC, Oshkosh Corporation OSK, HSBC HSBC and PulteGroup PHM.
A Few More Words on GARP
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 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 to 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 the 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 the market has an adequate number of companies that are witnessing a rise in earnings while trading at reasonable valuations? Going by a CFA Institute Blog by 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' limitations in calculating the future earnings growth rate of a stock.
There are some drawbacks to using the PEG ratio though. It does not consider the 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 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 purposes)
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 $800 Million (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 14 stocks that qualified the screening:
Perdoceo: This company’s accredited academic institutions offer quality postsecondary education, primarily online, to a diverse student population, along with campus-based and blended learning programs. Perdoceo’s academic institutions offer students industry-relevant and career-focused academic programs that are designed to meet the educational needs of today’s busy adults.
Perdoceo is an impressive value investment pick with its Zacks Rank #1 and a Value Score of A. Apart from a discounted PEG and P/E, Perdoceo also has an impressive long-term historical growth rate of 24.3%.
Encompass Health: As a provider of integrated healthcare services, Encompass Health offers facility-based patient care through its network of inpatient rehabilitation hospitals. With a national footprint that includes 158 hospitals across 36 states and Puerto Rico, the company delivers high-quality, cost-effective and integrated care in the healthcare space.
Encompass Health can also be an impressive value investment pick with its Zacks Rank #1 and a Value Score of B. Apart from a discounted PEG and P/E, the stock has an impressive long-term expected growth rate of 11.8%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Oshkosh: WI-based Oshkosh is a producer and seller of a varied range of vehicle bodies and specialty vehicles. It is also engaged in equipment financing and leasing solutions for its customers, primarily through third-party funding arrangements. Oshkosh has manufacturing operations in Australia, Canada, China, France, Mexico and the United Kingdom, apart from seven states of the United States.
Oshkosh has an impressive long-term expected growth rate of 35.5%. The stock currently has a Value Score of B and a Zacks Rank #1.
HSBC: Headquartered in London, HSBC Holdings plc is a major global banking and financial services firm, with $2.99 trillion in assets as of Mar 31, 2023. Operating through an international network of various offices in nearly 64 countries and regions in Europe, Asia, the Middle East and North Africa (MENA), North and Latin America, HSBC provides a wide range of financial services.
HSBC has an impressive long-term expected growth rate of 21.9%. The stock currently has a Value Score of A and a Zacks Rank #2.
PulteGroup: Based in Atlanta, GA, PulteGroup engages in homebuilding and financial services businesses, primarily in the United States. The company conducts operations through two primary business segments — Homebuilding and Financial Services.
PulteGroup has an impressive long-term historical growth rate of 33.4%. The stock currently has a Value Score of A and a Zacks Rank #1.
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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PulteGroup, Inc. (PHM) : Free Stock Analysis Report
Oshkosh Corporation (OSK) : Free Stock Analysis Report
HSBC Holdings plc (HSBC) : Free Stock Analysis Report
Encompass Health Corporation (EHC) : Free Stock Analysis Report
Perdoceo Education Corporation (PRDO) : Free Stock Analysis Report
