…While yardsticks such as dividend yield, the ratio of price to earnings, sales or book value are the most common value investing metrics that can single out stocks trading at a discount, these ratios fail to consider the potential of a stock. A stock’s PEG ratio, with the earnings growth component in it, does just that and this article has identified .
The original article has been edited here by munKNEE.com for length (…) and clarity ([ ])
A lower PEG ratio…(Price/Earnings to Earnings Growth Rate)…is always better for value investors but, 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 though. It doesn’t consider the very common situation of changing growth rates such as the forecast for the first three years at very high growth, followed by a sustainable but lower growth rate in the long term. As such, PEG-based investing can turn out to be even more rewarding if some other relevant parameters are 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 5 out of the 28 stocks that qualified [as a result of] the screening:
1. PACCAR Inc. (PCAR): Headquartered in Bellevue, WA, PACCAR, is a leading manufacturer of heavy-duty trucks in the world with additional substantial manufacturing exposure to light/medium trucks…[and] provides customer support for its products by supplying aftermarket parts as well as finance and leasing services…
- has an impressive expected five-year growth rate of 10.8%…[and]
- has a Value Score of A and
- has a Zacks Rank #2.
2. Colfax Corporation (CFX): Headquartered in Fulton, MD, CFX, is one of the leading manufacturing and engineering companies, specializing in products and services related to air and gas handling and fabrication technology…
- has a Zacks Rank #1,
- has a Value Score of B…[and]
- has an impressive growth rate of 29.3% for the current year.
3. Park Hotels & Resorts Inc. (PK) is a leading lodging REIT with a diverse portfolio of hotels and resorts with significant underlying real estate value…consisting of a portfolio of 54 premium-branded hotels and resorts with more than 32,000 rooms, the majority of which are located in prime United States markets with high barriers to entry…
- has a discounted PEG and P/E and
- holds a Zacks Rank #2 and
- has a Value Score of B.
4. ArcBest Corporation (ARCB) is a renowned logistics company with creative problem solvers who deliver integrated solutions.
- holds a Zacks Rank #1,
- has a Value Score of A…[and]
- has an impressive expected five-year growth rate of 40.2%.
5. Caterpillar Inc. (CAT) is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines. It is also a leading exporter in the United States with more than half of its sales generated outside the nation. Caterpillar operates through two divisions – Machinery, Energy & Transportation systems, and Financial Products.
- holds a Zacks Rank #1,
- has a Value Score A…[and]
- has an impressive earnings growth rate of 69.3% for the current fiscal [year].