In the equity market, investments always need to be prudently hedged in order to overcome uncertainties and limit losses related to external shocks. A question that arises often is whether one should resort to a value strategy that seeks discounted stocks or opt for growth investing in times of extreme market instability.
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.
The GARP theory enables strategic mingling of growth and value-investing principles, which gives us a hybrid strategy 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, 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 four such stocks. These include Carter's, Inc. CRI, AutoNation, Inc. AN, Teck Resources Limited TECK, TotalEnergies TTE and Marathon Petroleum MPC.
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 stocks’ P/E ratio with their 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 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 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 Style Score of A or B, when combined with a Zacks Rank #1, 2 or 3 (Hold), offer the best upside potential.
Here are five out of the 19 stocks that qualified the screening:
Carter's: Headquartered in Atlanta, GA, Carter’s is the largest marketer of branded apparel and related products for babies and young children in North America. Notably, the company has a portfolio of popular brands, including Carter’s, OshKoshB'gosh, Just One You, Child of Mine, Simple Joys, Skip Hop, and Precious Firsts.
Carter can be an impressive value investment pick with its Zacks Rank #2 and a Value Score of A. Apart from a discounted PEG and P/E, CRI also has an impressive fiscal 2022 expected earnings growth rate of 13.5%.
AutoNation: AutoNation is the largest automotive retailer in the United States. The company offers vehicle maintenance and repair services, vehicle parts, extended service contracts, vehicle protection products, and other aftermarket products. In addition, it arranges financing for vehicle purchases through third-party sources.
Apart from a discounted PEG and P/E, AutoNation has a Value Score of A and holds a Zacks Rank #1. AN also had a 34.8% earnings growth rate over the past five years. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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. The company's principal products include steelmaking coal; copper concentrates and refined copper cathodes; refined zinc and zinc concentrates; energy products, such as bitumen; and lead concentrates. Teck Resources also produces molybdenum, gold, silver, germanium, indium, mercury, and cadmium, as well as chemicals, industrial products, and fertilizers.
Teck Resources has an impressive growth rate of 38.7% for the next five years. TECK currently has a Value Score of A and carries a Zacks Rank #2.
TotalEnergies: France-based TotalEnergies SE is among the top five publicly traded global integrated oil and gas companies based on production volumes, proved reserves and market capitalization. TotalEnergies has operations in more than 130 countries across five continents.
TotalEnergies carries a Zacks Rank of 1 and has a Value Score of A. TTE has an impressive long-term historical growth rate of 10.7%.
Marathon Petroleum: Findlay, OH-based Marathon Petroleum is a leading independent refiner, transporter and marketer of petroleum products. The company, in its current form, came into existence following the 2011 spin-off of Houston, TX-based Marathon Oil’s refining/sales business into a separate, independent and publicly-traded entity. Marathon Petroleum operates in two segments: Refining and Marketing and Pipeline Transportation.
Marathon Petroleum has an impressive growth rate of 18.9% for the next five years. MPC currently has a Value Score of A and carries a Zacks Rank #1.
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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.
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 AutoNation, Inc. (AN) : Free Stock Analysis Report Marathon Petroleum Corporation (MPC) : Free Stock Analysis Report Carter's, Inc. (CRI) : Free Stock Analysis Report Teck Resources Ltd (TECK) : Free Stock Analysis Report TotalEnergies SE Sponsored ADR (TTE) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research