5 Lucrative PEG Stocks Ideal for GARP Investors
The investing track of the Oracle of Omaha over the past few decades shows a gradual shift from being a pure-play value investor to a GARP (growth at a reasonable price) investor. The logic behind this is the effectiveness of a mixed investment strategy over pure-play, value or growth approaches of investments.
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 Repsol, S.A. REPYY, Signet Jewelers SIG, Marathon Petroleum MPC, Avis Budget Group CAR and Greif GEF.
A Few More Words on GARP
A pure-play value investor misses the chance of betting on stocks that have bright long-term prospects. In 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 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 a stock’s 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 the expected long-term growth rate is 15%, the company's PEG will come down to 0.66, which indicates 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 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.) You can see the complete list of today's Zacks #1 Rank stocks here.
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 the five of the 10 stocks that qualified the screening:
Repsol, S.A.: Spain’s Repsol, S.A. is a global multi-energy provider, working to drive the evolution toward a low-emissions energy model. The company’s integrated business model ranges from oil and gas exploration and production to the commercialization of energy solutions for the home and mobility.
Repsol 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, Repsol also has an impressive long-term expected growth rate of 8.3%.
Signet Jewelers: Headquartered in Hamilton, Bermuda, Signet Jewelers is a retailer of diamond jewelry, watches as well as other products. The company operates in the United States, Canada, the U.K., the Republic of Ireland, and the Channel Islands. The company is often considered as the leading retailer of diamond jewelry.
Signet Jewelers can also 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, the stock has an impressive long-term historical growth rate of 12%.
Marathon Petroleum: Findlay, OH-based Marathon Petroleum is a leading independent refiner, transporter and marketer of petroleum products.Marathon Petroleum operates in two segments: Refining and Marketing and Pipeline Transportation.
Marathon Petroleum has an impressive long-term expected growth rate of 20%. The stock currently has a Value Score of B and a Zacks Rank #1.
Avis Budget Group: Headquartered in Parsippany, N.J., Avis Budget Group operates as a leading vehicle rental operator in North America, Europe and Australasia with an average rental fleet of nearly 650,000 vehicles. The company is a leading global provider of mobility solutions through its three most recognized brands — Avis, Budget and Zipcar.
Apart from a discounted PEG and P/E, Avis Budget Group has a Value Score of A and holds a Zacks Rank #1.
Greif: Delaware, OH-based Greif is a leading global producer of industrial packaging products and services with manufacturing facilities located in over 40 countries. It offers a comprehensive line of rigid industrial packaging products and containerboard and corrugated products for niche markets in North America. It is also a leading global producer of flexible intermediate bulk containers.
Greif has an impressive long-term historical growth rate of 17.1%. 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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