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4 Excellent PEG Stocks for GARP Investors

In a market hurt by external shocks, equity investments need to be properly hedged. A question that arises frequently is whether one should resort to a value strategy that seeks discounted stocks or opt for growth investing in times of extreme market instability.

The investing track of the Oracle of Omaha over the past few decades and his gradual shift from being a pure-play value investor to a GARP (growth at a reasonable price) investor might give us all the answers.

In this regard, we should take note that strategic mingling of both growth and value investing principles gives us a mixed investing strategy that is getting popular with each passing day. What GARPers look for is whether the stocks are somewhat undervalued and have solid sustainable growth potential (Investopedia).

And here comes 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 in it, helps finding those stocks that have solid future potential.

A lower PEG ratio is always better for investors.

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 M 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 four of the eight stocks that qualified the screening:

H&R Block, Inc. HRB: This global consumer tax services provider can be an impressive value investment pick with its Zacks Rank #1 and Value Style Score of 'A'. Apart from a discounted PEG and P/E, the stock also has an impressive long-term expected growth rate of 11%.

Lakeland Industries, Inc. LAKE: It is a manufacturer and seller of a comprehensive line of safety garments and accessories for the industrial protective clothing market. The stock currently holds a Zacks Rank #1 and has a Value Style Score of ‘B’. The company also has an impressive growth rate of 56.6% for the current fiscal.

KB Home KBH: This popular name in U.S. homebuildingcan also be a good value investment pick. It has an impressive expected five-year growth rate of 16.7%. It has a Value Style Score of ‘B’ and sports a Zacks Rank #1. You can see">the complete list of today’s Zacks #1 Rank stocks here.

Gulfport Energy Corporation GPOR: This independent natural gas and oil company is one of the largest producers of natural gas in the contiguous United States. The company holds a Zacks Rank #2 and a Value Style Score ‘A’. It also has an impressive long-term expected growth rate of 40%.

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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.

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KB Home (KBH): Free Stock Analysis Report
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H&R Block, Inc. (HRB): Free Stock Analysis Report
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