Despite occasional bouts of volatility, U.S. equities have shown resilience in recent days, with the S&P 500 and Nasdaq each touching new highs on Oct. 8. However, according to many market analysts, caution is growing over the possibility of near-term corrections and renewed volatility.
Against this backdrop of elevated valuations and shifting sentiment, many investors are turning to value investing over strategies such as growth or momentum. When uncertainty drives others to sell stocks at lower prices, value investors see it as an opportunity to acquire companies with solid fundamentals at a discount.
Here, we discuss four such stocks — Carnival Corporation CCL, Micron Technology MU, TD SYNNEX Corporation SNX and Ultrapar Participacoes UGP.
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:
Carnival: Headquartered in Miami, FL, Carnival is the world’s largest cruise operator and a leading leisure travel company, carrying nearly half of global cruise passengers. Operating across North America, Europe, Australia and Asia, its brands include Carnival Cruise Line, AIDA Cruises, Costa Cruises, Cunard, Princess Cruises, Holland America Line, P&O Cruises (Australia and UK), and Seabourn. The company offers a wide range of cruise experiences designed to cater to travelers of all ages, backgrounds and interests.
CCL currently has a Zacks Rank #1 and a Value Score of A. Carnival also has an impressive five-year historical growth rate of 28.5%.
Micron: Idaho-based Micron Technology has established itself as one of the leading worldwide providers of semiconductor memory solutions. Micron’s latest quarterly performance underscores its strategic positioning in the rapidly expanding AI-driven memory and storage markets. The positive impact of inventory improvement across multiple end markets is adding to top-line growth.
Micron can be an impressive value investment pick with its Zacks Rank #1 and a Value Score of B. Apart from a discounted PEG and P/E, the stock has an impressive long-term expected growth rate of 28.5%.
TD SYNNEX: Fremont, CA-based TD SYNNEX is a leading global IT distributor and solutions aggregator, providing a comprehensive range of technology distribution, logistics and integration services. The company was originally known as SYNNEX Corporation before rebranding as TD SYNNEX in September 2021, following its merger with Tech Data Corporation, a move that significantly expanded its global reach and vendor partnerships.
Apart from a discounted PEG and P/E, TD SYNNEX currently has a Zacks Rank #1 and a Value Score of A. SNX has a long-term expected growth rate of 10.7%.
Ultrapar: It is a Brazilian energy and infrastructure company engaged in distributing liquefied petroleum gas and fuels such as gasoline, ethanol, diesel and lubricants. It also operates AmPm convenience stores, Jet Oil service centers and liquid bulk storage terminals.
Ultrapar has a Zacks Rank #1 and a Value Score of A. UGP also has an impressive five-year expected growth rate of 14.5%.
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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Carnival Corporation (CCL): Free Stock Analysis Report Micron Technology, Inc. (MU): Free Stock Analysis Report TD SYNNEX Corporation (SNX): Free Stock Analysis Report Ultrapar Participacoes S.A. (UGP): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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