5 Profitable PEG-Based GARP Stocks for Investors

In the equity market, investments need to be prudently hedged to overcome uncertainties and limit losses related to external shocks. A question that arises often is whether one should resort to a value strategy that seeks discounted stocks or opt for growth investing in times of extreme market instability.

The investing track of the Oracle of Omaha over the past few decades and his gradual shift from being a pure-play value investor to a GARP (growth at a reasonable price) investor might give us all the answers.

Per the GARP theory, the strategic mingling of growth and value-investing principles gives us a hybrid strategy, offering an ideal investment by utilizing the best features of both. What GARPers look for is whether or not the stocks are somewhat undervalued and have solid sustainable growth potential (Investopedia).

Several stocks, which have surged significantly in the recent past, show an overwhelming success of this hybrid investing strategy over pure-play value and growth investments. Here, we will discuss the success of five such stocks. These include American Eagle Outfitters AEO, JD.com JD, PDD Holdings Inc. PDD, Air Lease AL and Tencent Music Entertainment Group TME.

A Few More Words on GARP

GARP investing gives priority to one of the popular value metrics — 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 the future earnings growth rates.

While P/E alone gives an idea of stocks that are trading at a discount, PEG, while adding the growth element to it, helps identify stocks with 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 the expected long-term growth rate is 15%, the company's PEG will come down to 0.66, a ratio indicating both undervaluation and future growth potential.

Unfortunately, this ratio is often neglected due to investors' limitations in calculating the future earnings growth rate of a stock.

There are some drawbacks to using the PEG ratio, though. It does not 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 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 the five stocks out of the seven that qualified the screening:

American Eagle: 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.

AEO stock can be an impressive pick with its Zacks Rank #1 and a Value Score of A. Apart from a discounted PEG and P/E, American Eagle also has an impressive long-term expected growth rate of 12.5%.

You can see the complete list of today’s Zacks #1 Rank stocks here.

JD.com: It is a leading supply chain-based technology and service provider. The company’s cutting-edge retail infrastructure seeks to enable consumers to buy anything anywhere. The company has opened its technology and infrastructure to partners, brands and other sectors as part of its Retail as a Service offering to help drive productivity and innovation across a range of industries.

JD stock can also be an impressive GARP investment pick with its Zacks Rank #1 and Value Score of A. Apart from a discounted PEG and P/E, JD.com also has a solid long-term historical growth rate of 63.5%.

PDD Holdings: It is a multinational commerce group that owns and operates a portfolio of businesses. PDD Holdings aims to bring more businesses and people into the digital economy so that local communities and small businesses can benefit from the increased productivity and new opportunities.

PDD has an impressive growth rate of 49.3% for the next five years. The stock currently has a Value Score of B and carries a Zacks Rank #1.

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, 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.

Air Lease carries a Zacks Rank of 2 and has a Value Score of A. AL has an impressive long-term expected growth rate of 13%.

Tencent Music Entertainment: It is a leading online music and audio entertainment platform in China, operating the country's popular music apps — QQ Music, Kugou Music, Kuwo Music and WeSing. TME's platform comprises online music, online audio, online karaoke, music-centric live streaming and online concert services, enabling music fans to discover, listen, sing, watch, perform and socialize around music.

Tencent Music Entertainment can also be an impressive value investment pick with its Zacks Rank #2 and a Value Score of B. Apart from a discounted PEG and P/E, the stock also has a solid long-term expected growth rate of 27.7%.

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.

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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American Eagle Outfitters, Inc. (AEO) : Free Stock Analysis Report

Air Lease Corporation (AL) : Free Stock Analysis Report

JD.com, Inc. (JD) : Free Stock Analysis Report

PDD Holdings Inc. (PDD) : Free Stock Analysis Report

Tencent Music Entertainment Group Sponsored ADR (TME) : Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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