5 Premium PEG-Based Value Stocks for Investors
In a market dealing with external shocks, value investing or the strategy of putting money in underappreciated stocks is fast gaining popularity. Although these stocks are apparently cheap compared to their peers and market, investment is done with the hope that the stock price will appreciate reasonably to match the intrinsic value of the business.
Several stocks that have surged significantly in the recent past have shown the overwhelming success of this pure-play investment strategy. Here, we discuss five such stocks — CRH plc CRH, American Eagle Outfitters AEO, Toll Brothers TOL, OSI Systems, Inc. OSIS and Dell Technologies DELL.
More on 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, while not taking into account the future growth potential of a stock, may end up convincing us to invest in stocks that are at a discount just because of their poor show. This may 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 to find the intrinsic value of a stock.
There are some drawbacks to using the PEG ratio though. It doesn’t 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 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 the five stocks that qualified the screening:
CRH: It is the leading provider of building materials solutions. The company has market leadership positions in both North America and Europe. As the essential partner for road and critical utility infrastructure, commercial building projects and outdoor living solutions, CRH's unique offering of materials, products and value-added services helps to deliver a more resilient and sustainable built environment.
CRH has a long-term expected growth rate of 16.2%. CRH currently carries a Zacks Rank of #1 and has a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
American Eagle: Based in Pittsburgh, PA, American Eagle is a specialty retailer of casual apparel, accessories and footwear for men and women aged 15–25 years. American Eagle, along with its subsidiaries, engages in the designing and marketing of casual clothing. The company’s assortment includes jeans, cargo pants, graphic T-shirts, as well as a range of accessories, outerwear and footwear.
American Eagle currently holds a Zacks Rank #1 and has a Value Score of A. American Eagle also has an impressive five-year expected growth rate of 15.3%.
Toll Brothers: Based in Horsham, PA, Toll Brothers builds single-family detached and attached home communities; master planned luxury residential resort-style golf communities; and urban low, mid, and high-rise communities, principally on the land it develops and improves.
Apart from a discounted PEG and P/E, Toll Brothers currently has a Zacks Rank #1 and a Value Score of B. Toll Brothers has a long-term historical growth rate of 23.9%.
OSI Systems: The company is a vertically integrated designer and manufacturer of specialized electronic systems and components for critical applications in the homeland security, healthcare, defense, and aerospace industries. OSI Systems combines more than 40 years of electronics engineering and manufacturing experience with offices and production facilities in more than a dozen countries to implement a strategy of expansion into selective end-product markets.
Apart from a discounted PEG and P/E, OSIS currently has a Zacks Rank #2 and a Value Score of B. OSI Systems has a long-term expected growth rate of 11%.
Dell: It designs, develops, manufactures, markets, sells, and supports various comprehensive and integrated solutions, products, and services in the Americas, Europe, the Middle East, Asia, and internationally. The company’s Infrastructure Solutions Group segment provides traditional and next-generation storage solutions. The Client Solutions Group segment provides desktops, workstations and notebooks; displays, docking stations, and other electronics; and third-party software and peripherals, as well as support and deployment, configuration and extended warranty services.
Dell currently holds a Zacks Rank #1 and has a Value Score of A. It also has an impressive five-year expected growth rate of 12%.
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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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American Eagle Outfitters, Inc. (AEO) : Free Stock Analysis Report
Dell Technologies Inc. (DELL) : Free Stock Analysis Report
Toll Brothers Inc. (TOL) : Free Stock Analysis Report
OSI Systems, Inc. (OSIS) : Free Stock Analysis Report
CRH PLC (CRH) : Free Stock Analysis Report
