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5 Lucrative PEG-Driven Value Stocks for Investors

In a market dealing with external shocks, value investing is fast gaining popularity. The success of value investors like Warren Buffett underscores this. Buffett and his business partner, Charlie Munger, managed to register a 20.1% CAGR for Berkshire Hathaway from 1965 through 2021. This favorably compares with a 10.5% rise of the S&P 500 Index during the same period.

Several other stocks, which have surged significantly in the recent past, have shown the overwhelming success of this pure-play investment strategy. Here we discuss five such stocks —Conagra Brands, Inc. CAG, Gold Fields Limited GFI, Gerdau S.A. GGB, NRG Energy NRG and Core & Main, Inc. CNM.

More on Value Investing

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

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

However, while not taking into account the growth potential of a stock, these ratios 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. 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 25 stocks that qualified the screening:

Conagra Brands: Chicago-based Conagra Brands is one of the leading branded food companies in North America. The company offers premium edible products, with refined focus on innovation.The company maintains a highly dynamic product portfolio and incorporates alterations within it as per the preference pattern of the end users. Some iconic brands of the company are Reddi-Wip, Hunt's, Healthy Choice, Frontera, Slim Jim, Blake's and Marie Callender.

Conagra Brands has a long-term expected growth rate of 7%. CAG currently carries a Zacks Rank of 2 and has a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

Gold Fields: Gold Fields is a globally diversified gold producer with nine operating mines in Australia, Chile, Ghana, Peru and South Africa, including the Asanko Joint Venture in Ghana, with total attributable annual gold-equivalent production of approximately 2.3Moz, attributable gold-equivalent Mineral Reserves of 48.6Moz and gold Mineral Resources of 111.8Moz.

Gold Fields currently holds a Zacks Rank #2 and has a Value Score of B. GFI also has an impressive five-year historical growth rate of 41.2%.

Gerdau:  Gerdau S.A., together with its subsidiaries, operates as a steel producer company in the Americas. The company operates through Brazil Business, North America Business, South America Business and Special Steel Business divisions.

Apart from a discounted PEG and P/E, GEF currently carries a Zacks Rank #2 and has a Value Score of A. Gerdau has a long-term historical growth rate of 82.7%.

NRG Energy: NRG Energy is engaged in the production, sale and delivery of energy and energy products and services to residential, industrial as well as commercial consumers in major competitive power markets in the United States. The company has financial and commercial headquarters in Princeton, NJ and operational headquarters in Houston, TX.

NRG Energy has an impressive long-term historical growth rate of 48.9%. NRG Energy stock currently has a Value Score of A and carries a Zacks Rank of 1.

Core & Main: Based in St. Louis, Core & Main is a specialized distributor of water, wastewater, storm drainage and fire protection products, and related services, to municipalities, private water companies and professional contractors across municipal, non-residential and residential end-markets nationwide. The company currently operates in 300 locations and provides its customers local expertise backed by a national supply chain.

CNM currently carries a Zacks Rank #2 and has a Value Score of A. It also has an impressive five-year expected growth rate of 18.8%.

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.

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

NRG Energy, Inc. (NRG) : Free Stock Analysis Report

Gerdau S.A. (GGB) : Free Stock Analysis Report

Conagra Brands (CAG) : Free Stock Analysis Report

Gold Fields Limited (GFI) : Free Stock Analysis Report

Core & Main, Inc. (CNM) : Free Stock Analysis Report

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