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Five Best PEG Stocks for Value Investing

When analysts can’t stop extolling about the effectiveness of the most common and uncomplicated valuation metric – the price-to-earnings ratio, one could find another metric, the price-to-earnings-growth ratio (PEG), which is more effective in identifying value stocks. PEG, as its definition goes, uses three parameters – Price, Earnings and Earnings Growth Rate – and hence is a bit complicated to calculate.

However, difficulty does not always mean you should avoid it. In fact, at this stage of global uncertainty, market volatility has reached a peak over the past one year. As a result, all the basic and simplest tools that were earlier sufficient to find safe and sound stocks have been called into question.

Whateverthe market conditions, price-to-earnings ratio can’t single handedly predict winning stocks. We definitely need other yardsticks to assess the intrinsic value or fair value of a particular stock. PEG is in fact one of the most important ratios to judge the fair value of a stock.

The PEG ratio is defined as: (Price/ Earnings)/ Earnings Growth Rate

A lower PEG ratio is always better for value investors.

Why PEG over P/E?

For value investors, considering PEG over price-to-earnings or P/E can be more rewarding as it helps in finding cheap stocks with future growth potential.

Let us crunch some numbers.

A company with a P/E ratio of 35 and a growth rate of 20% would have a PEG ratio of 1.75 (35 / 20 = 1.75) while a company with a P/E ratio of 40 and a growth rate of 50% would have a PEG ratio of 0.80 (40 / 50= 0.80).

If we only consider the P/E ratio, the first company with a lower P/E will obviously be in a better position (discounted state). But if we add the growth rate to justify the P/E, the scenario gets reversed.

However, PEG cannot perform magic alone; we need other relevant parameters to create a successful investment strategy. Let’s fine-tune the screening criteria to arrive at a winning combination.

Screening Criteria:

PEG Ratio less than X Industry Median

P/E Ratio (F1) less than X Industry Median

Zacks Rank #1 (Strong Buy) or #2 (Buy): Whether good market conditions or bad, stocks with a Zacks Rank #1 (Strong Buy) or #2 (Buy) have a proven history of success

Market Capitalization greater than $1 billion: This ensures that the companies 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 10%: Upward estimate revisions add to the optimism, leading to stocks price appreciation.

Here are five of the 11 stocks that qualified the screening:

Yamana Gold, Inc. (AUY)

Newell Brands Inc. (NWL)

Newmont Mining Corporation (NEM)

ACCO Brands Corporation (ACCO)

USG Corporation (USG)

Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back testing software.

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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: http://www.zacks.com/performance.

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NEWELL BRANDS (NWL): Free Stock Analysis Report
 
USG CORP (USG): Free Stock Analysis Report
 
NEWMONT MINING (NEM): Free Stock Analysis Report
 
YAMANA GOLD INC (AUY): Free Stock Analysis Report
 
ACCO BRANDS CP (ACCO): Free Stock Analysis Report
 
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