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5 Excellent GARP Picks Based on PEG Ratio

Value investing comes with its share of pitfalls. A pure play value investor always misses the chance of betting on stocks that have bright long-term prospects. The same way, growth investors often end up investing in expensive stocks.

As Warren Buffett rightly said,  these two approaches are joined at the hip. In other words, to make a long-term investment more effective, the principles of both value and growth strategies need to be combined.

The quest for a mixed investment strategy led to the introduction of the GARP (growth at a reasonable price) approach. What GARPers look for is whether the stocks are somewhat undervalued and have solid sustainable growth potential (Investopedia).

And 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 rate 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 17 stocks that qualified the screening:

Trinseo S.A. TSE: The company is a global materials solutions provider and manufacturer of plastics, latex binders, and synthetic rubber. Apart from a Zacks Rank #2 and a Value Score of A, the company also has an impressive expected five-year growth rate of 8%.

Ford Motor Company F: The company designs, manufactures, markets, and services a full line of Ford cars, trucks, SUVs, electrified vehicles and Lincoln luxury vehicles. It also provides financial services through Ford Motor Credit Company and is attempting to gain a dominant position in electrification, autonomous vehicles and mobility solutions. Apart from a discounted PEG and P/E, the stock has a Value Score of A and holds a Zacks Rank #2.

Intel Corporation INTC: This renowned name in the field of computer, networking, and communications platforms worldwide has an impressive current-year growth rate of 18%. The stock currently has a Value Score of B and a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here .

Syntel, Inc. SYNT: This is a global provider of integrated information technology and knowledge process services. Apart from a discounted PEG and P/E, the stock has a Value Score of B and holds a Zacks Rank #1.

The Greenbrier Companies, Inc. GBX: The company designs, manufactures, and markets railroad freight car equipment in North America and Europe. The stock currently sports a Zacks Rank #1 and has a Value Score of A. It also has an impressive long-term historical earnings growth rate of 19%.

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 backtesting software.

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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Greenbrier Companies, Inc. (The) (GBX): Free Stock Analysis Report
 
Ford Motor Company (F): Free Stock Analysis Report
 
Trinseo S.A. (TSE): Free Stock Analysis Report
 
Syntel, Inc. (SYNT): Free Stock Analysis Report
 
Intel Corporation (INTC): Free Stock Analysis Report
 
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