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DG vs. COST: Which Stock Should Value Investors Buy Now?

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Investors interested in stocks from the Retail - Discount Stores sector have probably already heard of Dollar General (DG - Free Report) and Costco (COST - Free Report) . But which of these two companies is the best option for those looking for undervalued stocks? Let's take a closer look.

There are plenty of strategies for discovering value stocks, but we have found that pairing a strong Zacks Rank with an impressive grade in the Value category of our Style Scores system produces the best returns. The Zacks Rank is a proven strategy that targets companies with positive earnings estimate revision trends, while our Style Scores work to grade companies based on specific traits.

Dollar General and Costco are sporting Zacks Ranks of #2 (Buy) and #3 (Hold), respectively, right now. The Zacks Rank favors stocks that have recently seen positive revisions to their earnings estimates, so investors should rest assured that DG has an improving earnings outlook. But this is just one piece of the puzzle for value investors.

Value investors also try to analyze a wide range of traditional figures and metrics to help determine whether a company is undervalued at its current share price levels.

Our Value category grades stocks based on a number of key metrics, including the tried-and-true P/E ratio, the P/S ratio, earnings yield, and cash flow per share, as well as a variety of other fundamentals that value investors frequently use.

DG currently has a forward P/E ratio of 17.87, while COST has a forward P/E of 28.50. We also note that DG has a PEG ratio of 1.25. This popular figure is similar to the widely-used P/E ratio, but the PEG ratio also considers a company's expected EPS growth rate. COST currently has a PEG ratio of 2.85.

Another notable valuation metric for DG is its P/B ratio of 4.98. The P/B ratio pits a stock's market value against its book value, which is defined as total assets minus total liabilities. For comparison, COST has a P/B of 7.13.

These metrics, and several others, help DG earn a Value grade of B, while COST has been given a Value grade of C.

DG stands above COST thanks to its solid earnings outlook, and based on these valuation figures, we also feel that DG is the superior value option right now.


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