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Buy These 5 Price-to-Book Value Stocks in 2022 for Gains
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Value investors have, over the years, preferred price-to-earnings ratio or P/E as a means to identify value stocks. However, in the case of loss-making companies that have a negative price-to-earnings ratio, the price-to-sales or P/S ratio is considered in determining their true value.
However, the price-to-book ratio (P/B ratio), though used less often, is also an easy-to-use valuation tool for identifying low-priced stocks with great returns.
The P/B ratio is calculated as below:
P/B ratio = market capitalization/book value of equity
The P/B ratio helps to identify low-priced stocks that have high-growth prospects. Ford Motor Company (F - Free Report) , General MotorsCompany (GM - Free Report) , Invesco (IVZ - Free Report) , DXC Technology Company (DXC - Free Report) and Atlas Corp. are some such picks.
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 12 stocks that qualified the screening:
Ford Motor Company designs, manufactures, markets and services cars, trucks, sport utility vehicles, electrified vehicles, and Lincoln luxury vehicles.
Invesco operates as an independent investment manager and offers a wide range of investment products and services. As of Sep 30, 2021, Invesco had offices in more than 20 countries and AUM worth $1.53 trillion.
Invesco currently has a Zacks Rank #2 and a Value Score of A. Invesco has a projected 3-5-year EPS growth rate of 13.5%.
General Motors Company is one of the world’s largest automakers. The top U.S. carmaker aims to spend more than $27 billion through 2025 to launch gen-next EVs powered by new-low cost batteries. General Motors plans to roll out 11 new EVs as part of its ambitious plans through 2025, including at least 20 new models by 2023.
General Motors has a Zacks Rank #2 and a Value Score of A. Celestica has a projected 3-5-year EPS growth rate of 9.9%.
DXC Technology Company provides information technology services and solutions primarily in North America, Europe, Asia, and Australia. DXC Technology Company has a Zacks Rank #2 and a Value Score of A.
DXC Technology Company was formed by the merger of Computer Sciences Corporation (“CSC”) and Enterprise Services Division of Hewlett Packard Enterprise (“HPE”), which was completed on Apr 1, 2017. DXC Technology Company has a projected 3-5-year EPS growth rate of 27.4%.
Atlas Corp. is an asset management company, which operates as an independent charter owner and manager of containerships.
Atlas Corp. has a projected 3-5-year EPS growth rate of 27.9%. Atlas Corp. currently has a Zacks Rank #1 and a Value Score of A.
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.
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.
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Buy These 5 Price-to-Book Value Stocks in 2022 for Gains
Value investors have, over the years, preferred price-to-earnings ratio or P/E as a means to identify value stocks. However, in the case of loss-making companies that have a negative price-to-earnings ratio, the price-to-sales or P/S ratio is considered in determining their true value.
However, the price-to-book ratio (P/B ratio), though used less often, is also an easy-to-use valuation tool for identifying low-priced stocks with great returns.
The P/B ratio is calculated as below:
P/B ratio = market capitalization/book value of equity
The P/B ratio helps to identify low-priced stocks that have high-growth prospects. Ford Motor Company (F - Free Report) , General Motors Company (GM - Free Report) , Invesco (IVZ - Free Report) , DXC Technology Company (DXC - Free Report) and Atlas Corp. are some such picks.
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 12 stocks that qualified the screening:
Ford Motor Company designs, manufactures, markets and services cars, trucks, sport utility vehicles, electrified vehicles, and Lincoln luxury vehicles.
Ford Motor has a projected 3-5-year EPS growth rate of 24.7%. Ford Motor currently has a Zacks Rank #1 and a Value Score of A. You cansee the complete list of today’s Zacks #1 Rank stocks here.
Invesco operates as an independent investment manager and offers a wide range of investment products and services. As of Sep 30, 2021, Invesco had offices in more than 20 countries and AUM worth $1.53 trillion.
Invesco currently has a Zacks Rank #2 and a Value Score of A. Invesco has a projected 3-5-year EPS growth rate of 13.5%.
General Motors Company is one of the world’s largest automakers. The top U.S. carmaker aims to spend more than $27 billion through 2025 to launch gen-next EVs powered by new-low cost batteries. General Motors plans to roll out 11 new EVs as part of its ambitious plans through 2025, including at least 20 new models by 2023.
General Motors has a Zacks Rank #2 and a Value Score of A. Celestica has a projected 3-5-year EPS growth rate of 9.9%.
DXC Technology Company provides information technology services and solutions primarily in North America, Europe, Asia, and Australia. DXC Technology Company has a Zacks Rank #2 and a Value Score of A.
DXC Technology Company was formed by the merger of Computer Sciences Corporation (“CSC”) and Enterprise Services Division of Hewlett Packard Enterprise (“HPE”), which was completed on Apr 1, 2017. DXC Technology Company has a projected 3-5-year EPS growth rate of 27.4%.
Atlas Corp. is an asset management company, which operates as an independent charter owner and manager of containerships.
Atlas Corp. has a projected 3-5-year EPS growth rate of 27.9%. Atlas Corp. currently has a Zacks Rank #1 and a Value Score of A.
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