If you follow the markets, you’ve likely seen share prices jump when a famous analyst makes a “strong buy” call on a stock, but what exactly makes strong buy stocks worth buying? There’s no universal formula to evaluate equities, and analysts each have their own unique criteria for determining strong buy stocks. However, a statistic that is consistently used to evaluate stocks is share price per earnings.
Price/Earnings = Earnings ÷ Share Price
A company’s value is largely determined by its earnings. Dividing earnings by share price tells us the rate investors are paying to own a piece of the company’s earnings. P/E ratios vary by industry, so always analyze them in context to the sector. When P/E is higher, it means that investors are paying a bigger premium in order to own the stock. Stocks with lower relative PEs are considered undervalued. However, the drawback of PE is that it’s a lagging indicator, meaning that it interprets historical data. It doesn’t speak for the future. That’s where P/E Growth Rate comes into the picture.
Price/Earnings Growth Rate (PEG) = (Share Price/EPS) ÷ EPS Growth
A low PE ratio doesn’t always denote a bargain buy. Strong buy stocks have good prospects for continued growth as well. This formula calculates how equities are priced in relation to its forecasted earnings. A PEG ratio of 1.0 is the benchmark for a fairly valued stock. A PEG lower than 1.0 indicates that the stock is undervalued, but a ratio over 1.0 means the stock is overvalued in relation to predicted earnings. Again, average PEG ratios vary by sector so always research competitors to give context to the data.
These are just a few areas that analysts use to compare stocks. Below average PEs and PEGs are commonly sought characteristics in strong buy stocks. Undervalued companies are often the strongest candidates for upside rallies. Let’s take a look at a few strong buy stocks that meet our criteria with undervalued PE and PEG ratios.
Best Strong Buy Stocks
Skechers USA, Inc. (NYSE: SKX) –
This footwear and apparel company has great fundamentals. Shares of Skechers USA are currently trading at a PE of 15.79. PE average in the textile and apparel industry is 27.44, so Skechers is trading at a significant discount compared to its peers. A PEG ratio that’s lower than 1.0 adds more credence to the bull case for SKX.
The stock has delivered a solid performance YTD, but share prices have dipped as of late. However, nothing is wrong with this company. Skechers performed well on its past earnings and, thanks to strong fundamentals, shares have plenty of room to run. This stock checks all the boxes for a strong buy stock.
YETI Holdings, Inc. (NSDQ: YETI) –
YETI is famous for making some of the highest quality coolers available today. The company had the misfortune of scheduling their IPO in the midst of 2018’s year-end market sell-off, but share prices have had an incredible rally since their December lows. The stock is up over 90% YTD, but how much higher can it go after a run like that? That all depends on how well YETI delivers on its earnings forecasts.
Based on current earnings, the stock is over-valued. It’s trading at over 80 times its book value with a trailing PE of over 40. However, buying YETI is a growth play so valuation isn’t as important. Investors are more interested in YETI’s 173.7% EPS this year or its 0.88 PEG ratio. The problem is that if earnings don’t meet expectations this stock has A LOT of room to drop. YETI has great growth prospects but keep your stops tight if you decide to dance at this party.
Cabot Oil & Gas Corp. (NYSE: COG) –
If you want some exposure to natural gas in your portfolio, Cabot Oil & Gas is a company worth looking at. Natural gas prices are extremely low as a result of industry oversupply, but Cabot is still making plenty of money. In fact, natural gas prices would have to fall under $2 for Cabot to take an operating loss.
Oil & gas isn’t a particularly exciting sector, but Cabot has good growth metrics that make it worth considering COG as a strong buy stock. It’s current PE ratio is higher than the sector average, but Wall Street has a bullish outlook on future earnings. According to its 0.51 PEG, the stock is undervalued given its projected growth. You’ll even get a small 1.08% dividend yield for holding the stock. If this company delivers on its earnings forecasts it could see more gains in the near future, but natural gas prices will have a direct impact on Cabot’s bottom-line.
Strong Buy Penny Stocks
VAALCO Energy, Inc. (NYSE: EGY) –
VAALCO is a micro-cap energy company that engages in the exploration, development, and production of crude oil resources. The stock has performed exceptionally well this year, with share prices up over 58% for the year. This company has great fundamentals and its currently trading at a PE of 0.97 with a PEG of 0.48. With that kind of valuation, it makes you wonder if something is wrong with this company.
However, there are no glaring weaknesses in VAALCO’s story. The company’s 1.4 current ratio is slightly lower than ideal, but it’s hard to find any weaknesses outside of that. Their last earnings call was upbeat, and the company is looking to expand production by opening three new drilling platforms in the next two years. Crude prices will obviously have an effect on this stock and the chart isn’t technically strong, but shares are trading at such bargain multiples that you may want to add EGY to your “strong buy stocks” watchlist.
AMERI Holdings, Inc. (NSDQ: AMRH) –
This company provides a range of services across various industries, like banking, financial services, insurance, robotics process automation consulting, and more. AMERI Holdings had a rough year in 2018, but it’s starting to turn things around. In November of 2018, the company reported its second quarter of adjusted year-over-year profitability.
Since then, the stock has been rallying. It’s up over 146% YTD and it’s still trading at a forward PE of only 2.53. The company is expecting to become profitable by next year so it’s very possible that this stock has seen its bottom. AMERI Holdings has exposure to several powerful socio-economic trends like automation, IoT development, augmented reality, and more. It’s still unclear if the company will meet its forecasts and become fully profitable next year, but a position in this stock will likely pay off big time if it does.
Strong Buy Stocks – The Conclusion
There are tons of different criteria used for finding strong buy stocks. The strategies shown here today involve principles that both value and growth investors use when analyzing investments. However, don’t rule out stocks with higher PEs if they have excellent potential for growth. Valuations are important but don’t be afraid to pay a slight premium to get the stocks you really want. There are many other important characteristics that you should research when trying to pick your own buy stocks, and PE is only one tool you can use to develop an opinion of a stock. Ratings from Wall Street analysts can help give you an idea of market sentiment for a stock, but be sure to draw your own conclusions before investing, No matter what kind of rating an analyst puts on a stock, you’re ultimately responsible for your own finances.
What do you think? Are any stocks you’re watching screming “BUY!” right now? Let us know! Comment below and tell us what stocks you’re waiting to pounce on.