4 Top-Rated Value Stocks to Buy Based on Discounted PEG
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 more than 19.8% CAGR for Berkshire Hathaway from 1965 through 2023. This compares favorably with a 10.2% rise of the S&P 500 Index during the same period. In this article, we discuss how the price/earnings to growth (PEG) ratio can become an efficient yardstick in picking the best value stocks.
Several stocks that have surged significantly in the recent past have shown the overwhelming success of this pure-play investment strategy. Here, we discuss four such stocks — Alaska Air Group ALK, ZIM Integrated Shipping Services ZIM, PayPal PYPL and Yelp Inc. YELP.
More on Value Investing
While searching for a suitable investment option, value investors with a varied risk appetite are unlikely to consider the PEG ratio among several other popular metrics like price/earnings (P/E), price/sales and price/book value (P/B).
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 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.
PEG Ratio at a Glance
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 purposes)
Zacks Rank #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.
Our Picks
Here are four stocks that qualified the screening:
Alaska Air Group: Together with its partner regional carriers, Alaska Air Group serves more than 120 cities across North America. Alaska Air Group operates two airlines, Alaska and Horizon. Horizon Air, which serves nearly 7 million passengers annually, sells its entire capacity to Alaska Airlines under a capacity purchase arrangement.
Alaska Air currently has a Zacks Rank #1 and a Value Score of A. Alaska Air also has an impressive five-year expected growth rate of 16.8%.
ZIM: Together with its subsidiaries, ZIM provides container shipping and related services in Israel and internationally. It provides door-to-door and port-to-port transportation services for various types of customers, including end-users, consolidators, and freight forwarders. The company also offers ZIMonitor, a premium reefer cargo tracking service.
Apart from a discounted PEG and P/E, ZIM currently has a Zacks Rank #1 and a Value Score of A. ZIM has a long-term expected growth rate of 47.4%.
PayPal: It has emerged as one of the largest online payment solutions providers on the back of its strong product portfolio and two-sided platform that enables it to offer smooth and secure transaction facilities to both customers and merchants. The company’s peer-to-peer payment service, Venmo, is the key catalyst behind the solid growth in its total payment volume (TPV).
Apart from a discounted PEG and P/E, PayPal currently has a Zacks Rank #1 and a Value Score of B. PayPal has a long-term expected growth rate of 15.9%.
Yelp: San Francisco, CA-based Yelp is a website engaged in providing information through an online community offering social networking. It covers restaurants, shopping, nightlife, financial services, health and a variety of services. The company helps businesses connect with consumers through ad products, messaging features like Request-A Quote, the Yelp transaction platform and retention tools, among others.
Yelp has an impressive long-term historical growth rate of 31.4%. Yelp currently has a Value Score of A and a Zacks Rank of 1. You can see the complete list of today’s Zacks #1 Rank stocks here.
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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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Alaska Air Group, Inc. (ALK) : Free Stock Analysis Report
Yelp Inc. (YELP) : Free Stock Analysis Report
PayPal Holdings, Inc. (PYPL) : Free Stock Analysis Report
ZIM Integrated Shipping Services Ltd. (ZIM) : Free Stock Analysis Report