For generations, value investors have looked to the price-to-earnings ratio, or P/E, as a means to finding value stocks.
However, Benjamin Graham, long considered to be the “father” of value investing, found that a low price-to-earnings ratio wasn’t enough to unearth the true undervalued companies.
Graham combined the low price-to-earnings ratios with the power of growth by using the PEG ratio. The PEG ratio is calculated by taking the price-to-earnings (P/E) ratio and dividing it by the growth rate.
Normally, a stock with a PEG ratio under 1.0 is considered a “value”.
With the S&P 500 and the Dow Industrials trading at or near record highs, you might think it would be hard to find ANY value but it does still exist if you dig deep.
Screening for PEG
I created a screen for PEG ratios under 1.0 on Zacks free Custom Screener.
Just this one criteria gave me 340 stocks. That’s not too shabby.
But that doesn’t mean all 340 companies are necessarily the companies I want to be buying right now. A list that big is somewhat unruly and isn’t small enough to give me the truly best companies.
Therefore, I eliminated companies that had a Zacks rank of 4 or 5, which are Zacks Rank Sells, and only searched for Buy ranked stocks which are Zacks Rank #1 (Strong Buy) or #2 (Buy).
That screen gave me 81 results which was more manageable.
I decided to add another layer of value on top of that screen, though, because I wanted to find the very top value stocks, which also have growth.
Therefore, I also searched for companies with a price-to-sales (P/S) ratio under 1.0. Companies with a low P/S are usually undervalued compared to the rest of the market.
While companies can find a penny here or there for the earnings component of a quarterly earnings report, it’s hard to fudge sales numbers.
Adding the P/S ratio under 1.0 gave me 29 stocks.
3 Stocks with Magic PEG Ratios
While there were a lot of great names on the final list, the following 3 companies stood out because they have both stellar fundamentals, including a low PEG ratio, and a solid business story, including strong earnings growth.
