4 PEG Value Stocks Trading at Attractive Discounts in July

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…

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 — Aveanna Healthcare AVAH, ArcBest Corporation ARCB, Nexa Resources NEXA and ORIX Corporation IX.

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 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.

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:

Aveanna Healthcare: This is a diversified U.S. home healthcare company providing pediatric and adult care through home-based services. Aveanna Healthcare operates across Private Duty Services, Home Health & Hospice and Medical Solutions, helping patients receive skilled nursing, therapy and personal care at home while reducing hospital and nursing facility use.

AVAH currently has a Zacks Rank #2 and a Value Score of A. Aveanna Healthcare also has an impressive five-year expected growth rate of 14.9%.

ArcBest: Headquartered in Fort Smith, AR, ArcBest is an integrated logistics company offering less-than-truckload shipping through ABF Freight and asset-light services, including truck brokerage, managed transportation, intermodal, warehousing and international logistics. It operates through Asset-Based and Asset-Light segments, providing integrated supply chain solutions for diverse customer shipping needs.

ArcBest currently has a Zacks Rank #1 and a Value Score of B. ARCB also has an impressive five-year expected growth rate of 37.7%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Nexa: Headquartered in Luxembourg, Nexa is a global zinc mining and smelting company operating through the Mining and Smelting segments. It owns polymetallic mines in Peru and Brazil, zinc smelters in both countries and produces zinc, gold, sulfuric acid and other metals and by-products for industrial markets.

Apart from a discounted PEG and P/E, Nexa currently has a Zacks Rank #1 and a Value Score of A. NEXA has a long-term historical growth rate of 49%.

ORIX: It provides diversified financial services across Japan, the United States and other global markets. ORIX operates across businesses including leasing, real estate, private equity, renewable energy, insurance, banking, consumer finance and aircraft, ship, investment and asset management services.

ORIX has a Zacks Rank #1 and a Value Score of A. IX also has an impressive five-year expected growth rate of 10.1%.

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