4 Low-PEG Value Stocks for Smarter Portfolio Growth Today

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 - Crocs CROX, LATAM Airlines Group LTM, Arrow Electronics ARW and Phibro Animal Health PAHC.

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 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:

Crocs: Based in Broomfield, CO, Crocs is one of the leading footwear brands with its focus on comfort and style. Famous for its iconic clog material, Crocs’ simple design and great comfort were an instant hit among consumers. The company offers a wide variety of footwear products, including sandals, wedges, flips and slides that cater to people of all ages.

CROX currently has a Zacks Rank #2 and a Value Score of B. It also has an impressive five-year historical growth rate of 23%.

LATAM Airlines: Headquartered in Santiago, Chile, LATAM Airlines is Latin America’s leading airline. The company is benefiting from its lean cost structure, expanding operations and strategic partnerships. Its focus on premium traffic presents significant opportunities for revenue growth and margin expansion.

LTM currently has a Zacks Rank #2 and a Value Score of A. It also has an impressive five-year expected growth rate of 24.6%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Arrow Electronics: The company is a New York-based global distributor of electronic components and enterprise computing products. The company offers one of the industry’s broadest portfolios, serving manufacturers and technology providers worldwide. Beyond distribution, Arrow delivers value-added services that help customers speed time to market, reduce total cost of ownership and drive demand for new products.

ARW currently sports a Zacks Rank #1 and a Value Score of B. It also has an impressive five-year expected growth rate of 15.2%.

Phibro: Headquartered in New Jersey, Phibro Animal Health Corporation 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.

PAHC currently flaunts a Zacks Rank #1 and a Value Score of B. It also has an impressive five-year expected growth rate of 21.5%.

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

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