4 High-Growth GARP Stocks With Attractive PEG Ratios to Buy Now

In the equity market, investments need to be prudently hedged to overcome uncertainties and limit losses related to external shocks. A question that often arises 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.

Per the GARP theory, the strategic mingling of growth and value-investing principles gives us a hybrid strategy, offering an ideal investment 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 that have surged significantly in recent years have demonstrated the 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 are Gold Fields Limited GFI, Adecoagro S.A. AGRO, Strategic Education STRA and ZTO Express Cayman ZTO.

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 the stocks’ P/E ratios to the 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 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 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 Value Style Score of A or B, when combined with a Zacks Rank #1, 2 or 3 (Hold), offer the best upside potential.

Our PEG-Driven Picks

Here are four stocks that qualified the screening:

Gold Field: It is a gold mining company with reserves and resources located across Australia, South Africa, Ghana, Peru, Chile and Canada. In addition to gold, the company also engages in exploration activities for copper and silver deposits. Founded in 1887, the company is headquartered in Sandton, South Africa.

GFI can be an impressive GARP investment pick with its Zacks Rank #2 and a Value Score of A. Apart from a discounted PEG and P/E, the stock has an impressive long-term historical growth rate of 27.9%.

Adecoagro: The company operates agricultural and agro-industrial businesses across Argentina, Brazil, Chile and Uruguay through its Farming and Sugar, Ethanol and Energy segments. The company produces key crops such as soybean, corn, wheat, peanut, sunflower and cotton and is also involved in rice production and seed genetics. In addition, Adecoagro produces dairy products, including raw milk, UHT milk, powdered milk, cheese, cream, flavored milk and other dairy items.

AGRO has a Zacks Rank #1 and a Value Score of A. Adecoagro also has an impressive five-year expected growth rate of 35%.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Strategic Education: The company, through its subsidiaries Strayer University and New York Code and Design Academy, provides post-secondary education programs in the United States. Strategic Education offers undergraduate and graduate degrees in business, IT, education, health services, nursing, public administration and criminal justice to working adults through campus-based and online programs, along with web and software development courses through NYCDA.

STRA stock can 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, Strategic Education also has an impressive long-term expected growth rate of 15%.

ZTO Express: The company is a leading player in the field of express delivery in China. This Shanghai-based company, along with its network partners, provides domestic and international express delivery services.

ZTO can also be an impressive value investment pick with its Zacks Rank #2 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 11.4%.

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Strategic Education Inc. (STRA): Free Stock Analysis Report

Gold Fields Limited (GFI): Free Stock Analysis Report

Adecoagro S.A. (AGRO): Free Stock Analysis Report

ZTO Express (Cayman) Inc. (ZTO): Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

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