Image: Bigstock Thanks to the one-and-a-half-year long pandemic-driven market selloffs, a number of growth stocks moved into the undervalued territory. However, with the ongoing extensive rollout of vaccines across nations as well as the gradual easing of the COVID-19 economic fear factor, market watchers believe that steep rebounds are in the cards for these beaten-down stocks anytime soon.

At this point in time, with many fundamentally great stocks now at their lows, investors are searching for a suitable investment option. They may currently resort to value investment to capitalize on the long-term potential of these stocks.

However, this apparently simple-to-understand investing discipline has its own share of pitfalls. Value investors, while betting on stocks, often fall prey to companies that have weak prospects. This may often lead to “value traps” — a situation when 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.

And here comes the importance of this not-so-popular but crucial value investing metric, price/earnings to growth (PEG) ratio.

While searching for a suitable value investment option, investors are unlikely to consider this ratio among a number of other popular value metrics like price/earnings (P/E), price/sales (P/S) or price/book value (P/B). This is because they often find this ratio complicated, considering the limitations in calculating the future earnings growth potential of a stock.

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 to find the intrinsic value 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.

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 purpose)

Zacks Rank of 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.

Here are six stocks that qualified the screening: Group 1 Automotive, Inc. ( GPI – Free Report ) : It is one of the leading automotive retailers in the world, with operations primarily in the United States, UK, and Brazil. Through its dealerships, the firm sells new and used cars, and light trucks. Apart from selling new and used vehicles, the company offers vehicle financing and insurance, and service contracts. Further, it provides maintenance and repair services, along with the sale of replacement parts and aftermarket automotive products. The company has an impressive long-term historical growth rate of 21.4%. The stock carries a Zacks Rank #1 and has a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here. Adtalem Global Education Inc. ( ATGE – Free Report ) : This is a leading global education provider and the parent organization of Adtalem Educacional do Brasil, American University of the Caribbean School of Medicine, Becker Professional Education, Carrington College, Chamberlain University, DeVry University and its Keller Graduate School of Management, Ross University School of Medicine, and Ross University School of Veterinary Medicine. These institutions offer a wide array of programs across medical and healthcare, financial services, and business and law. Apart from a discounted PEG and P/E, the stock has a Value Score of A and holds a Zacks Rank #2. The company also has an impressive long-term expected growth rate of 15%. United Microelectronics Corporation ( UMC – Free Report ) : This is a global semiconductor foundry. The company provides high-quality IC production […]

source 6 Value Stocks Based on PEG to Bet on Amid Market Crash

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