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 more than 20% CAGR for Berkshire Hathaway from 1965 through 2022. This compares favorably with a 10% rise of the S&P 500 Index during the same period.
Several 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 — American Eagle Outfitters AEO, Air Lease Corporation AL, Dell Technologies DELL, Universal Health Services UHS and PagSeguro Digital PAGS.
More on Value Investing
While searching for a suitable investment option, value investors with a varied risk appetite are unlikely to consider the price/earnings to growth (PEG) ratio among several other popular metrics like price/earnings (P/E), price/sales and 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 the 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 #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 the 11 stocks that qualified the screening:
American Eagle Outfitters: Based in Pittsburgh, PA, American Eagle is a specialty retailer of casual apparel, accessories and footwear for men and women aged 15–25 years. American Eagle, along with its subsidiaries, engages in the designing and marketing of casual clothing. The company’s assortment includes jeans, cargo pants, graphic T-shirts, as well as a range of accessories, outerwear and footwear.
American Eagle currently sports a Zacks Rank #1 and has a Value Score of A. American Eagle also has an impressive five-year expected growth rate of 12.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Air Lease: Los Angeles, CA-based Air Lease is a leading aircraft leasing company. It is primarily involved in purchasing commercial aircraft directly from the manufacturers and leasing the same to its airline customers across the globe. Some noteworthy manufacturers that the company works with are The Boeing Company and Airbus S.A.S. Besides leasing, the company sells planes from its portfolio to third parties such as other leasing companies, financial services and corporate airline entities.
Apart from a discounted PEG and P/E, Air Lease currently has a Zacks Rank #2 and a Value Score of A. Air Lease has a long-term expected growth rate of 11.7%.
Dell: Round Rock, TX-based Dell is a leading provider of servers, storage and PCs. It offers secure, integrated solutions that extend from the edge to the core to the cloud. Dell’s IT solutions support customers both in traditional infrastructure and multi-cloud environments. Dell operates in roughly 180 countries.
Dell has an impressive long-term expected growth rate of 12%. Dell currently has a Value Score of A and a Zacks Rank of 2.
Universal Health: King of Prussia, PA-based Universal Health owns and operates (through its subsidiaries) acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers and radiation oncology centers. The company’s range of services includes general and specialty surgery, internal medicine, obstetrics, emergency room care, radiology, oncology, diagnostic care, coronary care, pediatric services, pharmacy services and/or behavioral health services.
Apart from a discounted PEG and P/E, Universal Health currently has a Zacks Rank #2 and a Value Score of A. Universal Health has a long-term historical growth rate of 14.5%.
PagSeguro Digital: PagSeguro Digital, together with its subsidiaries, provides financial technology solutions and services for consumers, individual entrepreneurs, micro-merchants, and small and medium-sized companies in Brazil and internationally. The company's products and services include PagSeguro Ecosystem, a digital ecosystem that operates as a closed loop where its clients are able to address their day-to-day financial needs.
Apart from a discounted PEG and P/E, PagSeguro Digital currently has a Zacks Rank #1 and a Value Score of A. PagSeguro Digital has a long-term historical growth rate of 14.3%.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
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.
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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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American Eagle Outfitters, Inc. (AEO) : Free Stock Analysis Report
Dell Technologies Inc. (DELL) : Free Stock Analysis Report
Universal Health Services, Inc. (UHS) : Free Stock Analysis Report
Air Lease Corporation (AL) : Free Stock Analysis Report
PagSeguro Digital Ltd. (PAGS) : Free Stock Analysis Report
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