4 Best PEG-Based Value Stocks to Buy for Market-Beating Returns

In periods when market volatility seems to strike every other day, many investors turn to value investing over strategies like growth or momentum. When uncertainty drives others to sell stocks at lower prices, value investors see it as a chance to scoop up companies with solid fundamentals at a discount.

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 — Phibro Animal Health PAHC, Daktronics DAKT, UP Fintech Holding Limited TIGR and Gold Fields Limited GFI.

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:

Phibro: Headquartered in NJ, Phibro is a leading global diversified animal health and mineral nutrition company. The company provides a broad range of products for food animals, including poultry, swine, beef, dairy cattle and aquaculture. In addition to animal health and mineral nutrition products, Phibro manufactures and markets specific ingredients for use in the personal care, automotive, industrial chemical and chemical catalyst industries.

PAHC currently has a Zacks Rank #2 and a Value Score of A. Phibro also has an impressive five-year expected growth rate of 12.8%.

Daktronics: It designs, manufactures and sells electronic scoreboards, programmable display systems, and large-screen video displays for sports, commercial, and transportation uses worldwide. It operates through Commercial, Live Events, High School & Recreation, Transportation, and International segments. Daktronics’ products include video walls, scoreboards, LED message signs, intelligent transportation displays, transit and mass communication systems, sound systems, digital billboards, and price displays.

Daktronics currently has a Zacks Rank #1 and a Value Score of B. DAKT also has an impressive five-year historical growth rate of 59.5%.

UP Fintech: It offers online brokerage services for Chinese investors across New Zealand, the Cayman Islands, Singapore, the United States and other nations. Its Tiger Trade platform, available via app and web, enables trading in stocks, options, warrants and other securities. UP Fintech also provides value-added services, such as investor education, community features and IR solutions.

Apart from a discounted PEG and P/E, UP Fintech currently has a Zacks Rank #2 and a Value Score of B. TIGR has a long-term expected growth rate of 19.1%.

Gold Fields: It is a gold producer with mining reserves and resources across Australia, South Africa, Ghana, Peru, Chile and Canada. The company also engages in copper and silver exploration and is headquartered in Sandton, South Africa.

Gold Fields has a Zacks Rank #2 and a Value Score of B. GFI also has an impressive five-year expected growth rate of 36.4%.

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

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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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