The investing track of the Oracle of Omaha over the past few decades shows a gradual shift from being a pure-play value investor to a GARP (growth at a reasonable price) investor. The logic behind this is the effectiveness of a mixed investment strategy over pure-play, value or growth approaches of investments.
Several stocks, which have surged significantly in the recent past, show an overwhelming success of this hybrid investing strategy over pure-play value and growth investments. Here we will discuss the success of five such stocks. These include Pfizer PFE, Teck Resources TECK, NXP Semiconductors NXPI, Equinor EQNR and KB Home KBH.
A Few More Words on GARP
A pure-play value investor misses the chance of betting on stocks that have bright long-term prospects. In the same way, growth investors often end up investing in expensive stocks. In other words, to make a long-term investment more effective, the principles of both value and growth strategies need to be combined.
The quest for a mixed investment strategy led to the introduction of the GARP approach. What GARPers look for is whether the stocks are somewhat undervalued and have solid sustainable growth potential (Investopedia).
One of the fundamental metrics for finding GARP is the price/earnings growth ratio (PEG). 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 a stock’s P/E ratio with future earnings growth rate.
While P/E alone only gives the idea of stocks, which are trading at a discount, PEG, while adding the GROWTH element to it, helps to find those 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 the expected long-term growth rate is 15%, the company's PEG will come down to 0.66 that indicates both undervaluation and future growth potential.
Unfortunately, this ratio is often neglected due to investors' limitations to calculate 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 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 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.) You can see the complete list of today's Zacks #1 Rank stocks here.
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 the five of the 22 stocks that qualified the screening:
Pfizer: Pfizer boasts a sustainable pipeline with multiple late-stage programs that can drive growth. Pfizer markets a wide range of drugs and vaccines. Its business comprises six business units — Oncology, Inflammation & Immunology, Rare Disease, Hospital, Vaccines and Internal Medicine.
Pfizer is an impressive value investment pick with its Zacks Rank #2 and a Value Score of A. Apart from a discounted PEG and P/E, Pfizer also has an impressive long-term expected growth rate of 12.5%.
Teck Resources: Vancouver, Canada-based Teck Resources is a diversified resource company committed to mining and mineral development with business units focused on steelmaking coal, copper, zinc and energy.Teck Resources has a portfolio of world-class assets in stable jurisdictions and a solid pipeline of projects.
Teck Resources can also be an impressive value investment pick with its Zacks Rank #1 and a Value Score of B. Apart from a discounted PEG and P/E, the stock has an impressive long-term expected growth rate of 37.9%.
NXP Semiconductors: NXP Semiconductors provides high-performance mixed-signal and standard product solutions that leverage its RF, analog, power management, interface, security, as well as digital processing expertise. These solutions are used in a wide range of applications, namely automotive, wireless infrastructure, lighting, industrial, mobile, consumer and computing.
NXP Semiconductors has an impressive long-term expected growth rate of 22%. The stock currently has a Value Score of B and a Zacks Rank #2.
Equinor: Headquartered in Stavanger, Norway, Equinor ASA is one of the premier integrated energy companies in the world, with operations spreading across 30 countries. In Europe, the company is the second-largest supplier of natural gas. Equinor is also a leading seller of crude oil.
Apart from a discounted PEG and P/E, Equinor has a Value Score of A and holds a Zacks Rank #1. Equinor has an impressive long-term expected growth rate of 49.4%.
KB Home: Based in Los Angeles, CA, KB Home is a well-known homebuilder in the United States and one of the largest in the state. The company’s Homebuilding operations include building and designing homes that cater to first-time, move-up and active adult homebuyers on acquired or developed lands. KB Home also builds attached and detached single-family homes, town homes and condominiums.
KB Home has an impressive long-term expected growth rate of 17.1%. The stock currently has a Value Score of A and a Zacks Rank #1.
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.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
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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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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Pfizer Inc. (PFE) : Free Stock Analysis Report NXP Semiconductors N.V. (NXPI) : Free Stock Analysis Report KB Home (KBH) : Free Stock Analysis Report Teck Resources Ltd (TECK) : Free Stock Analysis Report Equinor ASA (EQNR) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research