For Immediate Release
Chicago, IL – February 15, 2022 – Stocks in this week’s article are Pfizer
PFE
, Teck Resources
TECK
, NXP Semiconductors
NXPI
, Equinor
EQNR
and KB Home
KBH
.
5 Lucrative GARP Stocks with Discounted PEG
The investing track of the Oracle of Omaha over the past few decades shows a gradual shift from being a pure-play value investor to a GARP (growth at a reasonable price) investor. The logic behind this is the effectiveness of a mixed investment strategy over pure-play, value or growth approaches of investments.
Several stocks, which have surged significantly in the recent past, show an overwhelming success of this hybrid investing strategy over pure-play value and growth investments. Here we will discuss the success of five such stocks. These include
Pfizer
,
Teck Resources
,
NXP Semiconductors
,
Equinor
and
KB Home
.
A Few More Words on GARP
A pure-play value investor misses the chance of betting on stocks that have bright long-term prospects. In the same way, growth investors often end up investing in expensive stocks. In other words, to make a long-term investment more effective, the principles of both value and growth strategies need to be combined.
The quest for a mixed investment strategy led to the introduction of the GARP approach. What GARPers look for is whether the stocks are somewhat undervalued and have solid sustainable growth potential (
Investopedia
).
One of the fundamental metrics for finding GARP is the price/earnings growth ratio (PEG). Although it is categorized under value investing, this strategy follows the principles of both growth and value investing.
The PEG ratio is defined as (Price/ Earnings)/Earnings Growth Rate
It relates a stock’s P/E ratio with future earnings growth rate.
While P/E alone only gives the idea of stocks, which are trading at a discount, PEG, while adding the GROWTH element to it, helps to find those stocks that have solid future potential.
A lower PEG ratio, preferably less than 1, is always better for GARP investors.
Say, for example, if a stock’s P/E ratio is 10 and the expected long-term growth rate is 15%, the company’s PEG will come down to 0.66 that indicates both undervaluation and future growth potential.
Unfortunately, this ratio is often neglected due to investors’ limitations to calculate the future earnings growth rate of a stock.
There are some drawbacks to using the PEG ratio though. It does not 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 in 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.
For the rest of this Screen of the Week article please visit Zacks.com at:
https://www.zacks.com/stock/news/1867082/5-lucrative-garp-stocks-with-discounted-peg?art_rec=quote-stock_overview-zacks_news-ID02-txt-1867082
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