At a time when volatility strikes every second day, investors often rely on value investing rather than other options like growth or momentum. As soon as other investors start selling their stocks at a cheaper rate in times of market uncertainty, value investors take this as an opportunity to pick good stocks at a discounted price.
Several stocks that have surged significantly in the recent past have shown the overwhelming success of this pure-play investment strategy. Here, we discuss four such stocks - TD SYNNEX SNX, Petroleo Brasileiro PBR or Petrobas, Venture Global VG and ConocoPhillips COP.
However, this apparently simple value investment technique has some drawbacks and not understanding the strategy properly may often lead to “value traps.” In such a situation, these value picks start to underperform over the long run as the temporary problems, which once drove the share price down, turn out to be persistent.
There are many value investment yardsticks, such as dividend yield, P/E or P/B, which are simple and can single out whether a stock is trading at a discount.
However, for investors looking to escape such value traps, it is also vital to determine where the stock would be headed in the next 12 to 24 months. Warren Buffett advises these investors to focus on the earnings growth potential of a stock. This is where lies the importance of a not-so-popular value investing metric, the PEG ratio.
PEG Ratio at a Glance
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 purposes)
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.
Our PEG-Driven Picks
Here are four stocks that qualified the screening:
TD SYNNEX: This Fremont, CA-based company is a leading global IT distributor and solutions aggregator, providing a comprehensive range of technology distribution, logistics and integration services. TD SYNNEX is benefiting from rising IT spending, driven by digital transformation, cloud adoption and cybersecurity demand.
SNX currently has a Zacks Rank #1 and a Value Score of B. TD SYNNEX also has an impressive five-year expected growth rate of 12.6%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Petrobas: Headquartered in Rio de Janeiro, Petrobras is the largest integrated energy firm in Brazil and one of the largest in Latin America. The company’s activities include exploration, exploitation and production of oil from reservoir wells, shale and other rocks, as well as refining, processing, trading and transportation of oil and oil products, natural gas and other fluid hydrocarbons, in addition to other energy-related activities.
PBR currently has a Zacks Rank #1 and a Value Score of A. Petrobas also has an impressive five-year expected growth rate of 33.8%.
Venture Global: This Arlington, VA-based company is a cost-efficient provider of LNG sourced from the rich natural gas basins in North America. The company is currently developing five natural gas liquefaction and export projects (along the U.S. Gulf Coast in Louisiana) —the Calcasieu Pass Project, the Plaquemines Project, the CP2 Project, the CP3 Project and Delta LNG.
Apart from a discounted PEG and P/E, Venture Global currently has a Zacks Rank #2 and a Value Score of A. VG has a long-term expected growth rate of 10.4%.
ConocoPhillips: Headquartered in Houston, TX, ConocoPhillips is primarily involved in the exploration and production of oil and natural gas. Considering proved reserves and production, the company is among the largest explorers and producers in the world.
COP has a Zacks Rank #1 and a Value Score of B. ConocoPhillips also has an impressive five-year historical growth rate of 16.3%.
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ConocoPhillips (COP): Free Stock Analysis Report
Petroleo Brasileiro S.A.- Petrobras (PBR): Free Stock Analysis Report
TD SYNNEX Corporation (SNX): Free Stock Analysis Report
Venture Global, Inc. (VG): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).