Here are a few value type criteria to screen for potential value stocks. Use results for a watch list for further analysis before investing in any of the results.
Market cap
Market capitalization less than $5 billion - Lynch generally avoids large, well-known companies in favor of small-cap stocks that still contain significant upside potential. Most fund managers define small-caps as companies with market capitalizations under $1 billion. Institutional investors often use market one investment criterion, requiring, for example, that a company have a market capitalization of $100 million or more to qualify as an investment. Analysts look at market capitalization in relation to book value for an indication of how investors value a company’s future prospects.
PEG ratio < 1.2
PEG ratio below 1.2 – The PEG ratio is a valuation metric that compares a company’s price-earnings ratio with its projected growth rate. Small, high-growth stocks generally trade at higher PEGs compared to the big-caps. If the PEG ratio is around 1, the company is considered fairly valued. A PEG ratio that is much higher than 1 indicates an overvalued company, and a PEG below 1 indicates an undervalued company. While the PEG ratio can effectively provide insight in certain evaluations, it is limited by its overriding focus on earnings growth. Revenue growth, cash flow, dividends, debt, and numerous other factors are also critical in determining value. Additionally, while PEG is useful for smaller companies it may be misleading for big-caps, since sustained growth is less important to their total returns. PEG is most useful when supplementing a thorough discounted cash flow analysis or relative valuation.
Earnings growth 15–30%
Five-year earnings growth between 15% and 30% per year - In investments, earnings growth refers to the annual rate of growth of earnings, or the amount of profit a company produces during a specific period, usually defined as a quarter (three calendar months) or year. Earnings typically refer to after-tax net income.. When the dividend payout ratio is same, the dividend growth rate is equal to the earnings growth rate. Earnings growth rate is a key value that is needed when the DCF model, or the Gordon's model as used for stock valuation. Companies that exceed a 30 percent earnings growth rate are confronted with two fundamental problems: (1) sustaining a high growth-rate over the long term is extremely difficult; and (2) stocks growing that rapidly are usually already being actively covered by Wall Street analysts, and Lynch prefers less well-known names and avoiding competition.
Institutional ownership 5–65%
Institutional ownership ranging between 5% and 65% - Institutional investors are organizations that trade large volumes of securities. Percentage institutional ownership is the fraction of shares outstanding owned by mutual funds, pension plans and other institutional investors. Most well-known stocks have at least 40% institutional ownership. Usually more than 70% of daily trading on the New York Stock Exchange is from institutional investors. Peter Lynch, among many other investors, uses institutional ownership to gauge market interest. He believes stocks with low institutional ownership have the best return potential. When mainstream Wall Street analysts identify a stock, price growth can be dramatic with the support of institutional money. Lower levels can be associated with greater price volatility.
Return on Equity > 15%
Indicates high profitability and potentially a competitive advantage
Debt-to-Equity ratio < 0.5
Implies that the company does not heavily depend on outside capital to finance its growth
Current ratio > 2
Makes sure that the company is able to pay its short term obligations
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