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5 Lucrative PEG Stocks for Value Investors

In a market hurt by external shocks, value investing is fast gaining popularity. The success of value investors like Warren Buffett further underscores this. Buffett and his business partner, Charlie Munger managed to register 20% compound annual growth in the market value of Berkshire Hathaway from 1965 through 2020 compared with a 10.2% rise of the S&P 500 during the same period.

Several stocks, which had declined in the past, have gradually shown an overwhelming success of value investing strategy. Here we will discuss the success of five such stocks and their favorable value parameters. These include Albertsons Companies, Inc. ACI, Laboratory Corp. of America LH or LabCorp, Phillips 66 PSX, FedEx Corporation FDX and Swire Pacific SWRAY.

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).

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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, 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 though. 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 stocks that qualified the screening:

Albertsons Companies: This is one of the largest food and drug retailers in the United States, with both a strong local presence and national scale. Albertsons Companies' food and drug retail stores offer grocery products, general merchandise, health and beauty care products, pharmacy, fuel, and other items and services.

Albertsons Companies has a long-term expected growth rate of 8%. The stock 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.

LabCorp: Headquartered in Burlington, NC, LabCorp is a leading healthcare diagnostics company, providing comprehensive clinical laboratory services and end-to-end drug development support. In Diagnostics, LabCorp is experiencing a broad geographic recovery in Base Business and across the company’s testing portfolio.

LabCorp currently holds a Zacks Rank #1 and has a Value Score of B. It also has an impressive five-year expected growth rate of 24.6%.

Phillips 66:  Based in Houston, TX, Phillips 66's operations incorporate refining, midstream, marketing and specialties, and chemicals. The company’s operations include processing, transportation, storing and marketing fuels and products all over the world. Phillips 66 Partners, the company's master limited partnership, is an important asset in the portfolio.

Apart from a discounted PEG and P/E, the stock currently has a Zacks Rank #2 and a Value Score of B. Phillips 66 has a long-term expected growth rate of 19.3%.

FedEx Corporation: Based in Memphis, TN, FedEx is the leader in global express delivery services. FedEx Express offers time-definite delivery to more than 220 countries and territories, connecting markets that comprise almost the entire gross domestic product of the world.

FedEx has an impressive long-term expected growth rate of 12%. The stock currently has a Value Score of A and carries a Zacks Rank of 2.

Swire Pacific: Swire Pacific engages in property, aviation, beverages, marine services, and trading and industrial businesses in Hong Kong, Mainland China, the rest of Asia, the United States, and internationally. SWRAY’s Property division develops, owns, and operates mixed-use properties.

Swire Pacific currently holds a Zacks Rank #2 and has a Value Score of B. It also has an impressive five-year expected growth rate of 58%.

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.

Click here to sign up for a free trial to the Research Wizard today.

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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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
 
Laboratory Corporation of America Holdings (LH) : Free Stock Analysis Report
 
Albertsons Companies, Inc. (ACI) : Free Stock Analysis Report
 
FedEx Corporation (FDX) : Free Stock Analysis Report
 
Phillips 66 (PSX) : Free Stock Analysis Report
 
Swire Pacific Ltd. (SWRAY) : Free Stock Analysis Report
 
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