Value investing offers an opportunity to enter the market and grab stocks that have otherwise been overlooked by the majority of investors and are thus trading at cheap multiples. Although price to earnings (P/E) and price to sales (P/S) valuation tools are more commonly used for stock selection, the price-to-book ratio (P/B ratio) is also an easy-to-use metric for identifying bargain stocks with high-growth prospects. This article identifies 6 of the 10 stocks that met or surpassed our screening parameters.
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What is Book Value?
Book value is the total value that would be left over, according to the company’s balance sheet, if it…[were to go] bankrupt immediately. In other words, this is what shareholders would theoretically receive if a company liquidated all its assets after paying off all its liabilities.
It is calculated by subtracting total liabilities from the total assets of a company. In most cases, this equates to the common stockholders’ equity on the balance sheet. However, depending on the company’s balance sheet, intangible assets should also be subtracted from the total assets to determine book value.
Understanding P/B Ratio
By comparing the book value of equity to its market price, we get an idea of whether a company is under- or overpriced. However, like P/E or P/S ratio, it is always better to compare P/B ratios within industries.
- A P/B ratio less than one means that the stock is trading at less than its book value, or the stock is undervalued and therefore a good buy.
- Conversely, a stock with a ratio greater than one can be interpreted as being overvalued or relatively expensive. For example, a stock with a P/B ratio of 2 means that we pay $2 for every $1 of book value. The higher the P/B, the more expensive the stock.
However, there is a caveat.
- A P/B ratio less than one can also mean that the company is earning weak or even negative returns on its assets, or that the assets are overstated, in which case the stock should be shunned because it may be destroying shareholder value.
- Conversely, the stock’s price may be significantly high – thereby pushing the P/B ratio to more than one – in the likely case that it has become a takeover target, a good enough reason to own the stock.
Moreover, the P/B ratio isn’t without limitations.
- It is useful for businesses – like finance, investments, insurance, and banking or manufacturing companies – with many liquid/tangible assets on the books.
- However, it can be misleading for firms with significant R&D expenditures, high-debt companies, service companies or those with negative earnings.
In any case, the ratio is not particularly relevant as a standalone number. One should also analyze other ratios like P/E, P/S, and debt to equity before arriving at a reasonable investment decision.
- Price to Book (common Equity) less than X-Industry Median: A lower P/B compared with the industry average implies that there is enough room for the stock to gain.
- Price to Sales less than X-Industry Median: The P/S ratio determines how much the market values every dollar of the company’s sales/revenues — a lower ratio than the industry makes the stock attractive.
- Price to Earnings using F(1) estimate less than X-Industry Median: The P/E ratio (F1) values a company based on its current share price relative to its estimated earnings per share – a lower ratio than the industry is considered better.
- PEG less than 1: PEG ratio links the P/E ratio to the future growth rate of the company. PEG ratio portrays a more complete picture than the P/E ratio. A value of less than 1 indicates that the stock is undervalued and investors need to pay less for a stock that has bright earnings growth prospect.
- Current Price greater than or equal to $5: They must all be trading at a minimum of $5 or higher.
- Average 20-Day Volume greater than or equal to 100,000: A substantial trading volume ensures that the stock is easily tradable.
- Zacks Rank less than or equal to #2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform irrespective of the market environment.
- Value Style Score equal to A or B: Our research shows that stocks with a Value Score of A or B when combined with a Zacks Rank #1 or 2 offer the best opportunities in the value investing space.
Here are six of the 10 stocks that qualified the screening:
- PCM, Inc. (PCMI), a technology solutions provider to businesses, government and educational institutions and individual consumers, has a projected 3-5 year EPS growth rate of 20%. Currently, the stock has a Value Score of A and a Zacks Rank #2.
- Meritage Homes Corporation (MTH), a leading homebuilder, currently has a Zacks Rank #2. It has a 3–5 year EPS growth rate of 14.1% and a Value Score of B.
- Western Digital Corporation (WDC), the largest hard disk drive (HDD) producer in the United States, currently has a Zacks Rank #1. It has a 3-5 year EPS growth rate of 19% and a Value Score of A.
- Rayonier Advanced Materials Inc. (RYAM) a global supplier of cellulose specialties products, currently has a Zacks Rank #2 and a Value Score of A. It has a 3-5 year EPS growth rate of 20.1%.
- Citizens Financial Group, Inc. (CFG) is the largest retail bank holding companies in the United States. The company has a projected 3-5 year EPS growth rate of 21.1%. Citizens Financial Group currently has a Zacks Rank #2 and a Value Score of A.
- MetLife, Inc. (MET), a leading financial services company, has a projected 3-5 year EPS growth rate of 11.4%. MetLife currently has a Zacks Rank #2 and a Value Score of A.
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