Top 4 Value Stocks With Impressive PEG Ratios to Buy Now
At a time when volatility is striking every second day, investors can 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 - Urban Outfitters Inc. URBN, Dentsply Sirona XRAY, LATAM Airlines Group LTM and Exelixis EXEL.
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.
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.
Here are four out of the 13 stocks that qualified the screening:
Urban Outfitters: Based in Philadelphia, PA, Urban Outfitters is a lifestyle specialty retailer that offers fashion apparel and accessories, footwear, home décor and gift products. The company's merchandises are generally sold directly to consumers through stores, catalogs, call centers and e-commerce platforms. Urban Outfitters has operations in the United States, Canada and Europe.
URBN currently has a Zacks Rank #1 and a Value Score of B. Urban Outfitters also has an impressive five-year historical growth rate of 20%.
Dentsply Sirona: Headquartered in York, PA, Dentsply Sirona is a global leader in the design, development, manufacture and marketing of dental consumables, dental laboratory products, dental specialty products and consumable medical device products. After the DENTSPLY-SIRONA merger, the business has been organized into two reporting segments, Dental & Healthcare Consumables and Technologies.
Apart from a discounted PEG and P/E, Dentsply Sirona currently has a Zacks Rank #2 and a Value Score of A. XRAY has a long-term expected growth rate of 7.4%.
LATAM Airlines: The company and its subsidiaries offer passenger and cargo air transportation across the Americas, the Caribbean, Europe and Oceania. As of Dec. 31, 2024, LATAM Airlines served 151 destinations in 27 countries with a fleet of 347 aircraft.
LTM has a Zacks Rank #1 and a Value Score of A. LATAM Airlines also has an impressive five-year expected growth rate of 14.8%.
Exelixis: Based in Alameda, CA, Exelixis is a biotechnology company focused on developing and commercializing therapies for hard-to-treat cancers. It leverages its expertise and partnerships to advance a pipeline of small molecules, Antibody-Drug Conjugates, and other biotherapeutics across multiple tumor types.
EXEL has an impressive long-term expected earnings growth rate of 21%. Exelixis currently has a Value Score of B and a Zacks Rank of 2. You can see the complete list of today's Zacks #1 Rank stocks here.
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
DENTSPLY SIRONA Inc. (XRAY) : Free Stock Analysis Report
Urban Outfitters, Inc. (URBN) : Free Stock Analysis Report
Exelixis, Inc. (EXEL) : Free Stock Analysis Report
LATAM Airlines Group S.A. (LTM) : Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).
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