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 good stocks at a discounted price.
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 — JD.com JD, Universal Health Services (UHS), Fresenius Medical Care FMS and Qifu Technology, Inc. QFIN.
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 stocks will 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.
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.
Here are four out of the 10 stocks that qualified the screening:
JD: The company is a supply chain-focused technology and service provider in China. It offers a diverse range of products, including computers, communication devices, and consumer electronics, along with home appliances. Its general merchandise portfolio spans food, beverages, fresh produce, baby and maternity products, furniture, household essentials, cosmetics, personal care items, pharmaceuticals, healthcare products, industrial supplies, books, automotive accessories, apparel, footwear, bags, and jewelry.
JD.com currently has a Zacks Rank #1 and a Value Score of A. JD also has an impressive five-year historical growth rate of 44.3%.
Universal Health: King of Prussia, PA-based Universal Health owns and operates (through its subsidiaries) acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers and radiation oncology centers. The company's range of services includes general and specialty surgery, internal medicine, obstetrics, emergency room care, radiology, oncology, and diagnostic care, among others.
Apart from a discounted PEG and P/E, UHS currently has a Zacks Rank #2 and a Value Score of A. Universal Health has a long-term expected growth rate of 16.9%.
Fresenius Medical: Based in Bad Homburg, Germany, Fresenius Medical Care is one of the largest integrated providers of products and services for individuals undergoing dialysis following chronic kidney failure. Fresenius Medical manufactures a variety of durable medical devices used for the treatment of end-stage renal disease.
Fresenius Medical has a Zacks Rank #1 and a Value Score of A. FMS also has an impressive five-year expected growth rate of 11.9%.
Qifu Technology: This is a leading AI-empowered Credit-Tech platform in China. By leveraging its sophisticated machine learning models and data analytics capabilities, Qifu Technology provides a comprehensive suite of technology services to assist financial institutions and consumers and SMEs in the loan lifecycle, ranging from borrower acquisition, preliminary credit assessment, fund matching and post-facilitation services.
Qifu Technology has an impressive long-term historical earnings growth rate of 39.1%. QFIN currently has a Value Score of A and a Zacks Rank of 1. You can see the complete list of today’s Zacks #1 Rank stocks here.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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Universal Health Services, Inc. (UHS) : Free Stock Analysis Report
Fresenius Medical Care AG & Co. KGaA (FMS) : Free Stock Analysis Report
JD.com, Inc. (JD) : Free Stock Analysis Report
Qifu Technology, Inc. (QFIN) : Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).
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