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In a market dealing with external shocks, value investing, or the strategy of putting money in underappreciated stocks, is fast gaining popularity. Although these stocks are apparently cheap compared to their peers, investment is made with the hope that the stock price will appreciate reasonably to match the intrinsic value of the business.

Several stocks that have surged significantly in the recent past have shown the overwhelming success of this pure-play investment strategy. Here, we discuss four such stocks — Exelixis EXEL, Enersys ENS, NRG Energy NRG and American Airlines AAL.

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While searching for a suitable investment option, value investors with varied risk appetite are unlikely to consider price/earnings to growth (PEG) ratio among a number of other popular metrics like price/earnings (P/E), price/sales (P/S) or price/book value (P/B).

This is because they often find this ratio complicated, considering the limitations in calculating the future earnings growth potential of a stock. Yardsticks such as dividend yield, P/E and P/B are most commonly used to single out stocks trading at a discount.

However, these ratios, while not taking into account the future growth potential of a stock, may end up convincing us to invest in stocks that are at a discount just because of their poor show. This may often lead to “value traps” — a situation when these value picks start to underperform over the long run as temporary problems, which, once pulled down the share price, turn out to be persistent.

In such a case, even if you buy a stock at less than its fair value, you might still end up paying more. And here comes the importance of this not-so-popular but crucial value investing metric, the PEG ratio.

The PEG ratio is defined as (Price/ Earnings)/Earnings Growth Rate

A low PEG ratio is always better for value investors.

While P/E alone fails to identify a true value stock, PEG helps to find the intrinsic value of a stock.

There are some drawbacks to using the PEG ratio, though. It doesn’t 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 some of 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 four stocks that qualified the screening:

Exelixis: Alameda, CA-based Exelixis is an oncology-focused biotechnology company that primarily focuses on the discovery, development and commercialization of new drugs for the treatment of difficult-to-treat cancers. The company is leveraging its investments, expertise and strategic partnerships to target an expanding range of tumor types and indications with its clinically differentiated pipeline of small molecules, antibody-drug conjugates and other biotherapeutics.

Exelixis has a long-term expected growth rate of 26.8%. EXEL currently carries a Zacks Rank of #2 and has a Value Score of B. You can see the complete list of today’s Zacks #1 Rank stocks here.

Enersys: Headquartered in Pennsylvania, EnerSys engages in the manufacturing, marketing and distribution of various industrial batteries. Additionally, the company develops battery chargers and accessories, power equipment and outdoor cabinet enclosures. This apart, it provides support services for clients. The company operates across the Americas (including North and South America), Europe, the Middle East and Africa (EMEA), and Asia (Asia, Australia and Oceania).

Enersys currently holds a Zacks Rank #1 and has a Value Score of B. ENS also has an impressive five-year expected growth rate of 14%.

NRG Energy: It is engaged in the production, sale and delivery of energy and energy products and services to residential, industrial as well as commercial consumers in major competitive power markets in the United States. The company has financial and commercial headquarters in Princeton, NJ and operational headquarters in Houston, TX.

Apart from a discounted PEG and P/E, NRG Energy currently has a Zacks Rank #1 and a Value Score of B. NRG has a long-term expected growth rate of 13.8%.

American Airlines: The company, through its subsidiaries, operates as an air network carrier. American Airlines primarily operates through two segments — Mainline and Regional affiliates. Furthermore, through its large cargo unit, the company offers a broad range of freight and mail services across the globe.

Apart from a discounted PEG and P/E, American Airlines currently has a Zacks Rank #2 and a Value Score of A. American Airlines has a long-term expected growth rate of 49.5%.

The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.

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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