Value investing is gaining popularity by the day. The success of value investors like Warren Buffett further underscores this.

Buffett believes that proper understanding of the “intrinsic value” of a stock makes the task easier. Yardsticks such as dividend yield, the ratio of price to earnings or to book value are the most common forms of intrinsic value calculation, which can easily single out stocks that the market is currently undervaluing.

However, these ratios, while not taking into account the 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 the temporary problems, which once affected 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 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 determine the intrinsic value of a stock.

There are some drawbacks of using the PEG ratio though. It doesn't consider the very 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 the screening criteria for a winning strategy:

PEG Ratio less than X Industry Median

P/E Ratio (using F1) less than M 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.)