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Bet on These 5 PEG-Ratio Based GARP Picks

Zacks

With millennials gradually entering the investment world, smart investment has become the buzzword. In the quest for more efficient investment approaches, this generation is frequently inclining toward hybrid investment patterns rather than traditional pure play theories like value or growth.

GARP (growth at a reasonable price) investment, often known as a special case of value investment accordingly is finding prominence among the new generation stakeholders. What GARPers look for is whether the stocks are somewhat undervalued and have solid sustainable growth potential (Investopedia).

And 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 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 expected long-term growth rate is 15%, the company's PEG will come down to 0.66, a ratio which indicates both undervaluation and future growth potential.

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 doesn't consider the very common situation of changing growth rates such as the forecast of the first three years at 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.)

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 16 stocks that qualified the screening:

AngioDynamics, Inc. ANGO: This company is a prominent name in the field of minimally invasive medical devices used by professional healthcare providers for vascular access, surgery, peripheral vascular disease and oncology. Its product lines include ablation systems, fluid management systems, vascular access products, angiographic products and accessories drainage products, thrombolytic products and venous products. The stock can 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 15%.

Zumiez Inc. ZUMZ: The company is a specialty retailer of apparel, footwear, accessories and hardgoods for young men and women. Apart from a Zacks Rank #1 and a Value Score of B, the company also has an impressive expected five-year growth rate of 18%.

GP Strategies Corporation GPX: This global performance improvement solutions provider of training, eLearning solutions, management consulting and engineering services has an impressive long-term growth rate of 15%. The stock currently has a Value Score of B and a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here.

AngloGold Ashanti Limited AU: This stock operates as a gold mining and exploration company. The company also produces silver, uranium oxide, copper, and sulphuric acid. Apart from a discounted PEG and P/E, the stock has a Value Score of A and holds a Zacks Rank #2.

Raymond James Financial, Inc. RJF: This is a leading diversified financial services company providing wealth management for individual investors and families, capital markets, asset management, banking and other services to individuals, corporations and municipalities. The stock carries a Zacks Rank #2 and has a Value Score of B. It also has an impressive long-term historical earnings growth rate of 17%.

Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and backtesting software.

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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