Value on the Move: Screening for Low PEG Ratio Stocks
It is not uncommon for a value investor to worry about being caught in a “value trap.” This occurs when a stock appears to be attractive based on valuation multiples, but the price remains depressed. The trap is that the stock’s seemingly low price is actually appropriate. The value trap can also occur when a stock is undervalued, but other investors fail to catch on to this mispricing.
A good way to avoid this problem is to look for stocks that have characteristics besides a low valuation that justify a higher price. Two screens highlighted in this article are designed to identify such stocks.
In this article
- Overview of the Screens
- Screen Performance
- Portfolio Characteristics
- Passing Companies
- What It Takes: Value on the Move Criteria
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Overview of the Screens
AAII’s fundamental stock screening and data research program, Stock Investor Pro, has two screens that isolate value stocks exhibiting earnings growth and price appreciation. These screens are also accessible on AAII.com and are labeled as “Value on the Move.” Both combine the price-earnings-to-growth ratio with other criteria to capture value stocks on an upward trajectory. The screens are called Historical Growth PEG and Estimated Growth PEG.
The PEG ratio is an alternative calculation to the price-earnings ratio in that it accounts for growth in earnings. This ratio attempts to examine whether a stock’s price is out of line with earnings and the earnings growth rate. It compares a stock’s price-earnings ratio to its growth rate in earnings. You can use the current or future price-earnings ratio and a historical earnings growth rate or a future, estimated earnings growth rate.
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