It seems that the value investing mantra needs to transform itself with shifts in equity playing habits. With voices being raised by legendary investors like Jeremy Grantham against the traditional value investing approach, we believe it is high time to ponder over the matter. As per Grantham, value investing can still work well, only the old school rules need to be altered (Published in a Forbes article).
This old approach undoubtedly overlooks the limitations of popular and simple value investing ratios like P/E (Price-to-Earnings) or P/B (Price-to-Book Value). These ratios are unable to judge the condition of a company's underlying business and overlook the earnings growth potential of a stock. Also, with changing accounting rules, P/E or P/B can often mislead investors and lead to value traps.
In the quest for better ways to measure value, the simplest approach that comes first in our mid is PEG ratio.
The PEG ratio is defined as: (Price/ Earnings)/ Earnings Growth Rate
A lower PEG ratio is always better for value investors.
While P/E alone fails to identify a true value stock, PEG helps to find the intrinsic value of a stock.
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 a 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 out of the 16 stocks that qualified the screening:
Tailored Brands, Inc. TLRD : This is a men's specialty apparel retailer in the United States and Canada. Its brands include Men's Wearhouse, Jos. A. Bank, Joseph Abboud, Moores Clothing for Men and K&G Fashion Superstores. The stock can also be an impressive value investment pick with its Zacks Rank #2 and Value Score of B. Apart from a discounted PEG and P/E, the stock also has an impressive long-term expected growth rate of 16.5%.
Guess', Inc. GES : The company designs, markets, distributes and licenses a lifestyle collection of contemporary apparel, denim, handbags, watches, footwear and other related consumer products. The stock can be an impressive value investment pick with its Zacks Rank #1 and Value Score of B. Apart from a discounted PEG and P/E, the stock also has an impressive long-term expected growth rate of 17.5%.
FTD Companies, Inc. FTD : This is a premier floral and gifting company. Through its diversified family of brands, the company provides floral, specialty foods, gifts and related products to consumers primarily in the United States and the United Kingdom. FTD Companies holds a Zacks Rank #2 and has a Value Score of A. The company also has an impressive growth rate of 15% for the next five years. You can see the complete list of today's Zacks #1 Rank stocks here .
ArcelorMittal MT : Based in Luxembourg, ArcelorMittal is the world's leading steel and mining company. With a presence in more than 60 countries, it operates a balanced portfolio of cost competitive steel plants across both developed and developing nations. It is the leader in all the main sectors - automotive, household appliances, packaging and construction. With a Zacks Rank #1 and a Value Score of A, this stock can prove to be a solid value investment pick at present. It also has an impressive long-term expected growth rate of 13.4%.
The Timken Company TKR : This company develops and markets bearings, transmissions, gearboxes, belts, chains, lubrication systems, couplings, industrial clutches and brakes, and related products worldwide. It operates through two segments, Mobile Industries and Process Industries. The stock can be an impressive value investment pick with its Zacks Rank #2 and a Value Score of A. Apart from a discounted PEG and P/E, the stock has an impressive long-term expected growth rate of 11.6%.
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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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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Timken Company (The) (TKR): Free Stock Analysis Report FTD Companies, Inc. (FTD): Free Stock Analysis Report ArcelorMittal (MT): Free Stock Analysis Report Guess?, Inc. (GES): Free Stock Analysis Report Tailored Brands, Inc. (TLRD): Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research