4 Discounted PEG Value Stocks to Boost Your Portfolio's Health

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 - Exelixis EXEL, DaVita DVA, Phibro Animal Health PAHC and Allison Transmission Holdings ALSN.

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:

Exelixis: Alameda, CA-based Exelixis is an oncology-focused biotechnology company that primarily focuses on the discovery, development and commercialization of new drugs for the treatment of difficult-to-treat cancers. The company is leveraging its investments, expertise and strategic partnerships to target an expanding range of tumor types and indications with its clinically differentiated pipeline of small molecules, antibody-drug conjugates (ADCs) and other biotherapeutics.

EXEL currently has a Zacks Rank #1 and a Value Score of B. Exelixis also has an impressive five-year expected growth rate of 19.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.

DaVita: Denver, CO-headquartered DaVita is a leading provider of dialysis services in the United States to patients suffering from chronic kidney failure, also known as end-stage renal disease (ESRD). The company operates kidney dialysis centers and provides related medical services primarily in dialysis centers and in contracted hospitals across the United States. Its services include outpatient dialysis services, hospital inpatient dialysis services and ancillary services such as ESRD laboratory services and disease management services.

DaVita currently has a Zacks Rank #1 and a Value Score of A. DVA also has an impressive five-year expected growth rate of 20.2%.

Phibro: Headquartered in New Jersey, 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 and 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.

Apart from a discounted PEG and P/E, Phibro currently has a Zacks Rank #1 and a Value Score of AB. PAHC has a long-term expected growth rate of 21.5%.

Allison Transmission: Headquartered in Indianapolis, IN, Allison Transmission Holdings is a manufacturer of fully-automatic transmissions for medium and heavy-duty commercial and heavy-tactical U.S. defense vehicles. In fact, the company is the largest producer of fully-automatic transmissions, holding the leading position in several niche markets. The firm also offers electric hybrid and fully electric propulsion systems.

Allison has a Zacks Rank #1 and a Value Score of A. ALSN also has an impressive five-year historical growth rate of 15.1%.

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This article originally published on Zacks Investment Research (zacks.com).

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