For Immediate Release
Chicago, IL – July 27, 2020 – Stocks in this week’s article are Quest Diagnostics Incorporated DGX, eBay Inc. EBAY, Cisco Systems, Inc. CSCO, Cigna Corporation CI and AbbVie Inc. ABBV.
5 Coronavirus-Proof GARP Stocks to Pick on Discounted PEG
Investors have been agonized by the coronavirus pandemic-triggered market sell offs. However, the benchmark indices touched a fresh high two days back, thanks to the positive sentiment surrounding the news of the U.S. government placing an initial vaccination order of 100 million doses to Pfizer and BioNTech.
Policymakers have left no stone unturned to provide an impetus to the market. The Fed slashed the benchmark interest rate to nearly zero and a quantitative easing program too was announced to increase money supply. President Trump signed economic relief packages to help small businesses, hospitals as well as to boost testing.
Now the big question is which investment strategy can you resort to right now? Some investors have managed to bridge the gap between value and growth with a hybrid strategy of investment called GARP (growth at a reasonable price). Their theory suggests that the principles of both value and growth strategies need to be combined, in order to make a long-term investment more effective. This strategy helps to find out stocks with solid long-term prospects that have become absurdly cheap amid economic woes.
GARP, often known as a special case of value investment, is gaining popularity nowadays. What GARPers look for is whether or not the stocks are somewhat undervalued and have solid sustainable growth potential (Investopedia).
Here lies the importance of a not-so-popular fundamental metric, the price/earnings growth (PEG) ratio. 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 the stocks P/E ratio with the future earnings growth rate.
While P/E alone only gives an idea of stocks that are trading at a discount, PEG, while adding the growth element to it, helps identify 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 expected long-term growth rate is 15%, the company’s PEG will come down to 0.66, a ratio that indicates both undervaluation and future growth potential.
However, the question that often arises is whether or not the market has an adequate number of companies that have been witnessing earnings growth while trading at reasonable valuations? Going by a CFA Institute blog by Nicolas Rabener, “on average, 38% of all stocks exhibit a PEG ratio below 1, which is more than enough for security selection.”
Unfortunately, this ratio is often neglected due to investors’ limitation to calculate the future earnings growth rate of a stock.
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 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.
For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/1015433/5-coronavirusproof-garp-stocks-to-pick-on-discounted-peg
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