Bet On These 5 GARP Stocks Based On Low PEG Ratio

In the course of strict screening to determine the intrinsic value of a company, investors often miss the chance of betting on stocks that have bright long-term prospects. The same way, growth investors often end up investing in expensive stocks.

If we keenly observe the investment track of the Oracle (NYSE:ORCL) of Omaha, we can see how, in quest of eliminating these hazards, this pure play value investor has gradually shifted to a mixed investment strategy or more precisely GARP (growth at a reasonable price) strategy.

This strategy combines both growth and value investing principles and has a proven track record of success. What GARPers look for is whether the stocks are somewhat undervalued and have solid sustainable growth potential (Investopedia).

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 rates 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 33 stocks that qualified the screening:

Boot Barn Holdings, Inc. (NYSE:BOOT) – This Zacks Rank #2 (Buy) company is a lifestyle retail chain and operates specialty retail stores in the United States. Boot Barn Holdings can be an impressive value investment pick with its Value Style Score of B. The company’s long-term expected earnings growth rate is projected to be 15.7%.

Perrigo Company plc (NYSE:PRGO) : The company develops, manufactures, markets, and distributes over-the-counter (OTC) consumer goods and pharmaceutical products worldwide. Apart from a Zacks Rank #2 and a Value Style Score of B, the stock also has an impressive long-term expected growth rate of 9.6%.

Boise Cascade Company (NYSE:BCC) : This is one of the largest producers of engineered wood products and plywood in North America and a leading U.S. wholesale distributor of building products. The stock has an impressive long-term expected growth rate of 18.5%. The stock currently has a Value Score of A and a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here.

DXC Technology Company (NYSE:DXC) : This is an independent, end-to-end IT services company primarily providing information technology services and solutions in North America, Europe, Asia, and Australia. Apart from a discounted PEG and P/E, the stock has a Value Score of B and holds a Zacks Rank #1.

Koppers Holdings Inc. (NYSE:KOP) : Headquartered in Pittsburgh, PA, Koppers is an integrated global provider of treated wood products, wood treatment chemicals and carbon compounds. The company holds a Zacks Rank #1 and has a Value Style Score A. It also has an impressive expected growth rate of 18% for the next five years.

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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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