Benzinga - by Zacks, Benzinga Contributor.
In a market dealing with external shocks, value investing is fast gaining popularity. The success of value investors like Warren Buffett underscores this. Buffett and his business partner, Charlie Munger, managed to register a 19.8% CAGR for Berkshire Hathaway from 1965 through 2023. This compares favorably with a 10.2% rise of the S&P 500 Index during the same period.
Several other stocks, which have surged significantly in the recent past, have shown the overwhelming success of this pure-play investment strategy. Here, we discuss five such stocks — Aptiv plc (NYSE: APTV), B2Gold Corp. (AMEX:BTG), Sylvamo Corporation (NYSE: SLVM), Tri Pointe Homes (NYSE: TPH) and Brinker International (NYSE: EAT).
More on Value Investing
While searching for a suitable investment option, value investors with a varied risk appetite are unlikely to consider price/earnings to growth ratio among several other popular metrics like price/earnings (P/E), price/sales (P/S) or price/book value (P/B).
This is because they often find this ratio complicated, considering the limitations in calculating a stock's future earnings growth potential. Yardsticks, such as dividend yield, P/E or P/B, are commonly used to single out stocks trading at a discount.
However, while not taking into account the growth potential of a stock, these ratios 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 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. 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 out of 17 stocks that qualified the screening:
Aptiv: This leading global technology and mobility company mainly serves the automotive sector. It is a designer and manufacturer of vehicle components as well as a provider of electrical, electronic and safety technology solutions to the global automotive market. The company is well-positioned to leverage growing electrification, connectivity and autonomy trends in the rapidly evolving automotive sector.
Aptiv has a long-term expected growth rate of 16.4%. Aptiv currently carries a Zacks Rank of 1 and has a Value Score of A.
B2Gold: Vancouver-based B2Gold is a gold producer with three operational mines (one each in Mali, Namibia, Philippines). So far in 2024, gold price has increased 11.3%, reaching an all-time high in March 2024. Currently, gold price is around $2,295 per ounce. This pickup in the price of gold is likely to improve B2Gold's results in the upcoming quarters.
B2Gold currently holds a Zacks Rank #1 and has a Value Score of A. B2Gold also has an impressive five-year historical growth rate of 18.9%.
Sylvamo: It produces and markets uncoated freesheet for cut size, offset paper and pulp. The company has mills in Europe, Latin America and North America. Of late, while uncoated freesheet conditions are getting better, the company is experiencing improved order books, resulting in less economic downtime.
Apart from a discounted PEG and P/E, Sylvamo currently has a Zacks Rank #1 and a Value Score of A. Sylvamo has a long-term expected growth rate of 29.9%.
Tri Pointe Homes: The company engages in the design, construction, and sale of single-family attached and detached homes in the United States. Tri Pointe Homes currently focuses on the strategic vision of building scale within existing markets while also driving organic growth where value-enhancing market opportunities exist.
Tri Pointe Homes has an impressive long-term historical growth rate of 16.5%. Tri Pointe Homes stock currently has a Value Score of B and a Zacks Rank of 1.
Brinker: It owns, operates, develops and franchises various restaurants under Chili's Grill & Bar (Chili's) and Maggiano's Little Italy (Maggiano's) brands. Brinker remains steadfast in its goal to drive traffic and revenues through a range of sales-building initiatives such as streamlining of menu and its innovation, strengthening its value proposition, better food presentation, advertising campaigns, kitchen system optimization and introduction of better service platform.
Apart from a discounted PEG and P/E, Brinker currently has a Zacks Rank #1 and a Value Score of B. Brinker has a long-term expected growth rate of 18.9%.
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.
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.
To read this article on Zacks.com click here.