Yahoo Finance Pick These 5 Lucrative GARP Stocks Using PEG Ratio
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.
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 (growth at a reasonable price) approach. What GARPers look for is whether 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 five such stocks. These include MGM Resorts International MGM, Tenet Healthcare THC, The Allstate Corp. ALL, Royal Caribbean Cruises RCL and Brinker International EAT.
A Few More Words on GARP
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 that 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, a ratio which indicates both undervaluation and future growth potential.
Unfortunately, this ratio has often been neglected due to investors' limitations in calculating the future earnings growth rate of a stock.
There are some drawbacks to using the PEG ratio though. It does not consider the 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.)
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 of the 18 stocks that qualified the screening:
MGM Resorts: It is one of the leading companies in the gaming and lodging industry and is well poised to grow on high brand awareness. The company’s superior business model, extensive non-gaming revenue opportunities, high-quality assets and attractive property locations are the primary growth drivers. In the past few years, the company has taken various initiatives to align every recognized brand into one global entertainment brand. This resulted in a disciplined business model with a unified view of strategy.
MGM Resorts is an impressive GARP investment pick with its Zacks Rank #2 and a Value Score of A. Apart from a discounted PEG and P/E, MGM Resorts also has a solid long-term historical growth rate of 23.2%.
Tenet Healthcare: It is an investor-owned healthcare services company that owns and operates general hospitals and related healthcare facilities for urban and rural communities in numerous states. Tenet Healthcare's revenue growth is fueled by increasing patient admissions, while its strategy of acquisitions and alliances aims to expand the scale of its business through inorganic growth.
THC has an impressive long-term historical growth rate of 30.8%. The stock currently has a Value Score of A and carries a Zacks Rank #1.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Allstate: Headquartered in Northbrook, IL, Allstate is the third-largest property-casualty insurer and the largest publicly-held personal lines carrier in the United States. The company’s consistent sales growth stems from a diversified product portfolio, strategic acquisitions and disciplined pricing.
Allstate carries a Zacks Rank of 2 and has a Value Score of B. ALL has an impressive long-term expected growth rate of 29.8%.
Royal Caribbean: The company owns and operates three global brands — Royal Caribbean International, Celebrity Cruises and Azamara Club Cruises. RCL is at the forefront of innovation within the vacation industry, introducing new products and experiences, including private destinations, to fuel growth. Among these expansions, the upcoming addition of the Royal Beach Club in Cozumel, Mexico, slated to receive guests in 2026, stands out.
Royal Caribbean 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 also has a solid long-term historical growth rate of 29.9%.
Brinker: Based in Dallas, TX, Brinker owns, operates, develops and franchises various restaurants under Chili’s Grill & Bar (Chili’s) and Maggiano’s Little Italy (Maggiano’s) brands. Brinker remains steadfast in its goal to drive traffic and revenues through a range of sales-building initiatives such as streamlining of menu and its innovation, strengthening its value proposition, better food presentation, advertising campaigns, kitchen system optimization and introduction of better service platform.
Brinker stock can be an impressive pick with its Zacks Rank #1 and a Value Score of A. Apart from a discounted PEG and P/E, EAT also has an impressive long-term expected growth rate of 18.9%.
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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Royal Caribbean Cruises Ltd. (RCL) : Free Stock Analysis Report
Brinker International, Inc. (EAT) : Free Stock Analysis Report
The Allstate Corporation (ALL) : Free Stock Analysis Report
Tenet Healthcare Corporation (THC) : Free Stock Analysis Report
MGM Resorts International (MGM) : Free Stock Analysis Report
