U.S. stocks’ momentum appears to have slowed over the past two months. As of late April, the S&P 500® Index has moved sideways since reaching a record high on March 1. At one point in April, the S&P 500 slipped below its 50-day moving average for the first time since the November U.S. election.
If you are investing for the long term, be careful not to place too much weight on short-term corrections. After all, U.S. stocks—as measured by the S&P 500—have surged more than 5% year to date, 13% over the past 12 months, and 71% since the March 2009 bottom, on a price return basis as of April 20, 2017 (see the S&P 500 chart below). Plus, short-term corrections may provide you with an opportunity to buy the dips—if that strategy aligns with your objectives and risk constraints.
In fact, finding value may be one of the more important objectives for you to consider within the context of this long bull run. What’s more, you may still be able to find investments that offer both value and growth potential.
Pegging down value and growth
One of the most widely used metrics by which a stock can be evaluated is its price-to-earnings (P/E) ratio. Broadly speaking, stocks today are expensive relative to their long-term historic average (see the “Forward P/E ratio: S&P 500” chart below, left). With that said, not all segments of the market are considered expensive relative to their historic values. Large- and mid-cap growth stocks, for instance, appear undervalued relative to their 20-year average P/E (see the “Current P/E vs. 20-year average P/E” chart below, right).
One metric that you might use to find investments that offer both attractive value and growth characteristics is the P/E-to-growth (PEG) ratio. The PEG ratio attempts to identify stocks that have strong future earnings growth potential priced at relatively attractive levels. It is calculated as a stock’s P/E divided by the expected earnings growth rate. A stock with a lower PEG ratio is considered relatively attractive compared with one that has a higher PEG ratio, all else equal.1 Additionally, a PEG ratio less than one may be considered attractive in and of itself.
You can use the Fidelity.com stock screener to find and evaluate companies based on their PEG ratio. For example, you could run a stock screen searching for common stock (click Most Popular, Security Type, Common Stock) of large companies (click Market Cap, and select both Large Cap and Mega Cap) with a low PEG ratio (click PEG Ratio, Very Low).
The top ten results of this screen sorted by lowest PEG ratio, as of April 25, 2017, are:
- Baxter International (BAX)—0.41 PEG ratio
- Valero Energy (VLO)—0.55 PEG ratio
- eBay (EBAY)—0.63 PEG ratio
- Lam Research (LRCX)—0.86 PEG ratio
- Morgan Stanley (MS)—0.87 PEG ratio
- Applied Materials (AMAT)—0.93 PEG ratio
- Goldman Sachs (GS)—0.93 PEG ratio
- Corning (GLW)—0.93 PEG ratio
- Express Scripts (ESRX)—0.97 PEG ratio
- HCA Holdings (HCA)—1.02 PEG ratio
The next step when running a screen—if you find an investment that piques your interest—may be to dig deeper into that opportunity. Additionally, any stock you discover or evaluate via a screener should be considered within the context of a well-diversified investing strategy that conforms to your specific time horizon, objectives, and risk parameters. To further research a stock idea that you might uncover in a screen result, you can apply additional fundamental and technical criteria within the screener, and research more about the stock on its snapshot page on Fidelity.com.
Value and growth abroad
Given the run-up in U.S. stock prices, you might also want to consider assessing the international scene for growth and value—particularly if you may be underexposed to these investments and they could help diversify your portfolio.
Indeed, international stock market valuations—including emerging markets—have appeared more attractive than U.S. stocks, based on their P/E ratios (see the “Trailing 12-Month P/E Ratios” chart below, left). By country, current P/E ratios have appeared most attractive for Russia, Brazil, Turkey, China, and South Korea (see the “Cyclical P/E Ratios” chart below, right). Of course, remember that investing in international stocks can bring more risks than domestic stocks, particularly emerging and developing international markets. Consequently, be sure to fully research these opportunities, and don’t rely solely on P/Es to signal where bargains may exist (for example, a lower P/E could reflect increased political or trade risks).
You can search for international stocks in the Fidelity.com stock screener by clicking Security Type and selecting Company Headquarters Location (if you want to exclude U.S. stocks, select North America and check each box except United States of America). Six international stocks show up in the screen results demonstrated above, as of April 25. They are:
- Manulife Financial (MFC)—1.06 PEG ratio
- Sun Life Financial (SLF)—1.19 PEG ratio
- Canadian Pacific Railway (CP)—1.22 PEG ratio
- Bank of Montreal (BMO)—1.29 PEG ratio
- Toronto-Dominion Bank (TD)—1.33 PEG ratio
- Bank of Nova Scotia (BNS)—1.39 PEG ratio
It's worth noting that all the results of this screen generate Canadian financial stocks. Consequently, you would want to consider if this is a segment of the market that aligns with your objectives and risk constraints.
In addition to stocks, you can also use the exchange-traded fund (ETF) screener (login required) and mutual fund screener on Fidelity.com to find fund investments that may match your objectives. For example, in the ETF screener, you might search for large (click Basic ETF / ETP Facts, Net Assets, Very High), low-cost ETFs (click Net Expense Ratio, Very Low) with high cash flow growth (click Fundamentals, Equity, Cash Flow Growth %, Very High) and a low price-to-cash flow ratio (click Price/Cash Flow, Very Low).
This screen generates five results, as of April 25, 2017. They are:
- iShares Edge MSCI USA Momentum Factor ETF (MTUM)
- Health Care Select Sector SPDR Fund (XLV)
- Consumer Discretionary Select Sector SPDR Fund (XLY)
- Vanguard Consumer Discretionary ETF (VCR)
- Vanguard Healthcare ETF (VHT)
Here's a tip: you may be able to find fund investments that focus on specific investment qualities, such as growth and value, using factor-based ETFs.
Screeners can be a powerful tool to help generate new ideas or analyze existing ones. You can use a screener to search for value and growth using P/E ratio, PEG ratio, cash flow growth, and price-to-cash flow, plus many other data points—including technical indicators.
Remember that if you find a stock via the screener and that stock appears to have attractive growth and value prospects, you should do all the research needed to fully understand the characteristics and risks involved in that opportunity.
- If you are an active investor, consider Fidelity’s trading guide to help trade the market.
- Find more investing ideas with Fidelity Viewpoints.
Past performance is no guarantee of future results.
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