In times of market volatility, investors tend to sit on cash waiting for the big correction to happen. Although they may not recognize it as such, this is an attempt to time the market. It’s a strategy that is destined to fail.
Many of the world’s most respected gurus advise against timing the market. This includes famed investor Peter Lynch, who stated “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves.”
Peter Lynch is a legendary investor known for his investment strategy: Growth at a Reasonable Price (GARP). His method is unique, as it balances growth and value. To do so, he made the price-to-earnings to growth (PEG) ratio famous. The PEG ratio is a measure that solves one of the shortcomings of the P/E ratio as a standalone. By factoring in the expected growth rate, you can determine which stocks are a bargain.
A PEG ratio under 1 indicates that the company’s share price is not keeping up with expected growth rates. As such, it is considered undervalued. Naturally, the reverse is true. If the ratio stands above 1, then it is considered overvalued. With that in mind, here are three stocks that would be Peter Lynch approved!
A top energy stock
Encana (TSX:ECA)(NYSE:ECA) has had a tough of it over the past year. The company’s stock price has plummeted by about 50% since May of last year. The company was hammered after it made the transformational acquisition of Newfield Exploration. Although the deal extended its production footprint, the market felt that Encana overpaid for the assets and resulted in diluted shareholder value.
Fast forward to 2019 and the company is slowly making a comeback. Although it is up approximately 10% year to date, the company’s share price remains depressed. It’s trading at a cheap PEG of 0.57 and a low eight times forward earnings.
A high growth retail stock
The recent trade war between China and the U.S. has dragged down retail stocks. Aritzia (TSX:ATZ) has been no exception, with its share price dropping along with the broader sector. It’s important for investors to keep the big picture in mind; Aritzia is one of the few growing retail stocks. The company has posted 18 straight quarters of comparable sales growth and since its IPO has consistently posted double-digit growth.
Once again, the most recent downtrend is an opportunity. The company is expected to grow earnings at a 40% clip and as such, has a PEG ratio of only 0.65.
A top financial stock
One of my favourite stocks, goeasy (TSX:GSY), has been chronically undervalued for years. It’s therefore not surprising to see that the market has finally caught on to this gem of a company. Year to date, the company’s stock price has shot up by 41%, thereby far outpacing the market.
Despite the current run-up, the company is still cheap. The company is trading at a forward PE of only 9.89 with a PEG ratio of 0.91. This is a company that is expected to grow earnings by 40% on average through 2020. This is inline with company guidance.
Is this achievable? Yes, without a doubt. Since 2011, management has met or exceeded guidance every year.
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Fool contributor mlitalien owns shares of goeasy Ltd and Aritzia Inc.