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5 Low Price-to-Book Stocks with Great Growth Prospects
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Given the rally in stocks in the past one month, value analysis is the best approach to identify great bargains. Though 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 low-priced stocks with high-growth prospects.
The P/B ratio is calculated as below:
P/B ratio = market capitalization / book value of equity
Understanding P/B Ratio
To begin with, it is important to understand what book value is. Book value is the total value that would be left over, according to the company’s books of account, if it were to go 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 total assets of a company. In most cases, that would equate to the 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 the book value.
By comparing book value of equity to its market price, we get an idea of whether a stock 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 1 means the stock is trading at less than its book value, which can also mean the stock is undervalued and therefore a good buy. Conversely, a stock with a ratio greater than 1 can be interpreted as being overvalued or relatively expensive.
But there is a caveat. A P/B ratio less that 1 can also mean that the company is earning weak or even negative return on its assets, or the assets are overstated, in which case the stock should be shunned because it may be destroying shareholder value. Conversely, the stock’s share price may be significantly high – thereby pushing the P/B ratio to more than 1 – in the likely case that it has become a takeover target, a good enough reason to own the stock.
But, the P/B ratio isn't without its limitations. It is useful for businesses – like finance, investments, insurance and banking or manufacturing companies – with many liquid/tangible assets on their books. However, it can be misleading for firms with large R&D expenditures or high-debt companies or service companies or those with negative earnings.
In any case, the P/B 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.
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 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 robust 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 Style Score of ‘A’ or ‘B’ when combined a Zacks Rank #1 or 2 offer the best opportunities in the value investing space.
Here are the five stocks that qualified the screening:
Mallinckrodt Public Limited Company is a specialty biopharmaceutical with a worldwide presence. Key areas of focus include autoimmune and rare diseases including neurology, rheumatology, nephrology and pulmonology as well as pain. The stock currently has a Zacks Rank #2 and a Value score of ‘A’. The company’s projected 3–5 year EPS growth rate is 10.26%.
AerCap Holdings N.V. (AER - Free Report) This integrated global aviation company has a Zacks Rank #2 and a Value score of ‘A’. The company’s projected 3–5 year EPS growth rate is 9.83%
Nippon Telegraph and Telephone Corporation provides a variety of telecommunications services, including telephone, telegraph, leased circuits, data communication, terminal equipment sales and other services. The stock currently has a Zacks Rank #1 and a Value score of ‘A’. The company’s projected 3–5 year EPS growth rate is 20.65%.
Korea Electric Power Corp. (KEP - Free Report) , also known as KEPCO, is an integrated electric utility engaged in the generation, transmission and distribution of electricity as well as development of electric power resources in South Korea. This Zacks Rank #2 stock has a 3–5 year EPS growth rate of 25% and a Value score of ‘A’.
Companhia de Saneamento Basico do Estado de Sao Paulo, or SABESP (SBS - Free Report) , provides public water and sewage services in the state of Sao Paulo, Brazil. The stock currently has a Zacks Rank #1 and a Value score of ‘B’. The company’s projected 3–5 year EPS growth rate is 29.7%.
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 trial to the Research Wizard 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.
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.
Zacks Restaurant Recommendations: Inaddition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »
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5 Low Price-to-Book Stocks with Great Growth Prospects
Given the rally in stocks in the past one month, value analysis is the best approach to identify great bargains. Though 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 low-priced stocks with high-growth prospects.
The P/B ratio is calculated as below:
P/B ratio = market capitalization / book value of equity
Understanding P/B Ratio
To begin with, it is important to understand what book value is. Book value is the total value that would be left over, according to the company’s books of account, if it were to go 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 total assets of a company. In most cases, that would equate to the 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 the book value.
By comparing book value of equity to its market price, we get an idea of whether a stock 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 1 means the stock is trading at less than its book value, which can also mean the stock is undervalued and therefore a good buy. Conversely, a stock with a ratio greater than 1 can be interpreted as being overvalued or relatively expensive.
But there is a caveat. A P/B ratio less that 1 can also mean that the company is earning weak or even negative return on its assets, or the assets are overstated, in which case the stock should be shunned because it may be destroying shareholder value. Conversely, the stock’s share price may be significantly high – thereby pushing the P/B ratio to more than 1 – in the likely case that it has become a takeover target, a good enough reason to own the stock.
But, the P/B ratio isn't without its limitations. It is useful for businesses – like finance, investments, insurance and banking or manufacturing companies – with many liquid/tangible assets on their books. However, it can be misleading for firms with large R&D expenditures or high-debt companies or service companies or those with negative earnings.
In any case, the P/B 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.
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 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 robust 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 Style Score of ‘A’ or ‘B’ when combined a Zacks Rank #1 or 2 offer the best opportunities in the value investing space.
Here are the five stocks that qualified the screening:
Mallinckrodt Public Limited Company is a specialty biopharmaceutical with a worldwide presence. Key areas of focus include autoimmune and rare diseases including neurology, rheumatology, nephrology and pulmonology as well as pain. The stock currently has a Zacks Rank #2 and a Value score of ‘A’. The company’s projected 3–5 year EPS growth rate is 10.26%.
AerCap Holdings N.V. (AER - Free Report) This integrated global aviation company has a Zacks Rank #2 and a Value score of ‘A’. The company’s projected 3–5 year EPS growth rate is 9.83%
Nippon Telegraph and Telephone Corporation provides a variety of telecommunications services, including telephone, telegraph, leased circuits, data communication, terminal equipment sales and other services. The stock currently has a Zacks Rank #1 and a Value score of ‘A’. The company’s projected 3–5 year EPS growth rate is 20.65%.
Korea Electric Power Corp. (KEP - Free Report) , also known as KEPCO, is an integrated electric utility engaged in the generation, transmission and distribution of electricity as well as development of electric power resources in South Korea. This Zacks Rank #2 stock has a 3–5 year EPS growth rate of 25% and a Value score of ‘A’.
Companhia de Saneamento Basico do Estado de Sao Paulo, or SABESP (SBS - Free Report) , provides public water and sewage services in the state of Sao Paulo, Brazil. The stock currently has a Zacks Rank #1 and a Value score of ‘B’. The company’s projected 3–5 year EPS growth rate is 29.7%.
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 trial to the Research Wizard 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.
Zacks Restaurant Recommendations: Inaddition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »