In value investing, it is a common practice to pick stocks that are cheap but fundamentally strong. There are a number of investment styles for finding great stocks at attractive values.
While considering valuation metrics, though price-to-earnings and price-to-sales are the first choices, the P/B ratio is also emerging as a convenient tool for identifying low-priced stocks that have high-growth prospects.
Price-to-book ratio or P/B ratio is essentially the ratio of stock price to book value, i.e., how much an investor needs to pay for each dollar of the book value of a stock. It is calculated by dividing the current closing price of the stock by the book value per share.
Here’s the formula of P/B ratio:
P/B ratio = market capitalization/book value of equity.
The P/B ratio helps to identify low-priced stocks that have high growth prospects.
Signet Jewelers Limited
SIG
,
ASE
Technology Holding
ASX
,
Group 1 Automotive
GPI
,
Teck Resources Limited
TECK
and
Target Corporation
TGT
are some such picks.
Now let us understand the concept of book value.
What’s Book Value?
There are several ways by which book value can be defined. Book value is the total value that would be left over, according to the company’s balance sheet, if it goes bankrupt immediately. In other words, this is what shareholders would theoretically receive if a company liquidates 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 common stockholders’ equity on the balance sheet. However, depending on the company’s balance sheet, intangible assets should also be subtracted from 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 of 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. Thus, the higher the P/B, the more expensive the stock.
But 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 expenditure, high debt, service companies, or those with negative earnings.
In any case, the ratio is not particularly relevant as a standalone number. One should analyze other ratios like P/E, P/S, and debt to equity before arriving at a reasonable investment decision.
Screening Parameters
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 links the P/E ratio to the future growth rate of the company. The 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 prospects.
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 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 our five picks out of the 19 stocks that qualified the screening:
Signet Jewelers
is a retailer of diamond jewelry, watches as well as other products.
Signet Jewelers has a projected 3-5-year EPS growth rate of 8%. Signet Jewelers currently has a Zacks Rank #2and a Value Score of A.You cansee
the complete list of today’s Zacks #1 Rank stocks here
.
ASE Technology Holding
is a provider of semiconductor manufacturing services in assembly and testing.
ASE Technology Holding has a projected 3-5 year EPS growth rate of 27.8%. ASE Technology Holding currently has a Zacks Rank #2 and a Value Score of A.
Teck Resources Limited
is a diversified resource company committed to mining and mineral development with business units focused on steelmaking coal, copper, zinc and energy.
Teck Resources has a projected 3-5 year EPS growth rate of 38.7%. TECK currently has a Zacks Rank #2 and a Value Score of A.
Group 1 Automotive
is a leading automotive retailer. Through its dealerships, the firm sells new and used cars and light trucks. Apart from selling new and used vehicles, Group 1 Automotive offers vehicle financing and insurance and service contracts.
Group 1 Automotive has a projected 3-5-year EPS growth rate of 10.7%. It currentlyhas a Zacks Rank #2 and a Value Score of A.
Target Corporation
provides an array of goods ranging from household essentials and electronics to toys and apparel for men, women and kids. Target Corporation has evolved from just being a pure brick-&-mortar retailer to an omni-channel entity. The company has been investing in technologies, improving websites and mobile apps and modernizing its supply chain to keep pace with the changing retail landscape and better compete with pure e-commerce players.
Target has a projected 3-5 year EPS growth rate of 16.5%. TGT currently has a Zacks Rank #2 and a Value Score of B.
Get the rest of the stocks on the list and startputting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back testing software.
The Research Wizard is a great place to begin. It’s easy to use. Everything is in plain language. And it’s very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today
.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at:
https://www.zacks.com/performance
7 Best Stocks for the Next 30 Days
Just released: Experts distill 7 elite stocks from the current list of 220 Zacks Rank #1 Strong Buys. They deem these tickers “Most Likely for Early Price Pops.”
Since 1988, the full list has beaten the market more than 2X over with an average gain of +25.4% per year. So be sure to give these hand-picked 7 your immediate attention.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days.
Click to get this free report