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Zacks published this market news item, with source attribution at http://www.zacks.com/.

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NASDAQ:ARCB, NASDAQ:AVAH, NYSE:TX

3 Low-PEG GARP Stocks That Look Attractive Right Now

In the equity market, investments need to be prudently hedged to overcome uncertainties and limit losses related to external shocks. A question that often arises is whether one should resort to a value strategy that seeks discounted stocks or opt for growth investing in times of extreme market inst…

The investing track of the Oracle of Omaha over the past few decades and his gradual shift from being a pure-play value investor to a GARP (growth at a reasonable price) investor might give us all the answers.

Per the GARP theory, the strategic mingling of growth and value-investing principles gives us a hybrid strategy, offering an ideal investment by utilizing the best features of both. What GARPers look for is whether or not the stocks are somewhat undervalued and have solid, sustainable growth potential (Investopedia).

Several stocks that have surged significantly in recent years have demonstrated the overwhelming success of this hybrid investing strategy over pure-play value and growth investments. Here, we will discuss the success of three such stocks. These are Aveanna Healthcare AVAH, ArcBest Corporation ARCB and Ternium TX.

A Few More Words on GARP

GARP investing gives priority to one of the popular value metrics — 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 ratios to the future earnings growth rates.

While P/E alone gives an idea of stocks that are trading at a discount, PEG, while adding the growth element to it, helps identify stocks with 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, a ratio indicating both undervaluation and future growth potential.

Unfortunately, this ratio is often neglected due to investors' limitations in calculating 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 over the long term.

Hence, PEG-based investing can be even more rewarding if some other relevant parameters are also taken into consideration.

Here are 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 Value Style Score of A or B, when combined with a Zacks Rank #1, 2 or 3 (Hold), offer the best upside potential.

Growth Score of less than or equal to B: Our research shows that stocks with a Growth Style Score of A or B, when combined with a Zacks Rank #1, 2 or 3, offer the best upside potential.

Our PEG-Driven Picks

Here are three stocks that qualified the screening:

Aveanna: The company is a diversified U.S. home care provider offering pediatric and adult healthcare services that enable patients to receive care at home, reducing reliance on hospitals and skilled nursing facilities. Through its Private Duty Services, Home Health & Hospice and Medical Solutions segments, the company provides skilled nursing, therapy, personal care, hospice and medical supply services.

AVAH can be an impressive GARP investment pick with its Zacks Rank #2, a Value Score of A and a Growth Score of A. Apart from a discounted PEG and P/E, the stock has an impressive long-term expected growth rate of 14.9%.

ArcBest: This is an integrated logistics company providing less-than-truckload (LTL) freight services through ABF Freight and asset-light solutions, including truckload brokerage, managed transportation, intermodal, warehousing and international shipping. Operating through its Asset-Based and Asset-Light segments, ArcBest delivers end-to-end supply chain solutions to a diversified customer base across the United States.

ARCB has a Zacks Rank #1, a Value Score of B and a Growth Style Score of B. ArcBest also has an impressive five-year historical growth rate of 37.7%.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Ternium: The company is a leading steel producer operating across Mexico, Brazil, the Southern Region and international markets, manufacturing a wide range of flat and long steel products for industries including automotive and construction. Through its Steel and Mining segments, the company also produces and sells iron ore and pellets while providing engineering and related services.

TX can also be an impressive GARP investment pick with its Zacks Rank #1, a Value Score of A and a Growth Score of B. Apart from a discounted PEG and P/E, the stock also has a solid long-term expected growth rate of 52.8%.

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