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Tap 5 Bargain Stocks With Incredibly Low EV/EBITDA Ratios

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Investors generally have a fixation on the price-to-earnings (P/E) strategy while seeking stocks trading at attractive prices. This straight-forward, easy-to-calculate ratio is the most preferred among all the valuation metrics in the investment toolkit for working out the fair market value of a stock. But even this ubiquitously used valuation metric is not without its pitfalls.

Although P/E is the most popular valuation metric, a more complicated multiple called EV-to-EBITDA works even better. Often considered a better alternative to P/E, it gives the true picture of a company’s valuation and earnings potential, and has a more complete approach to valuation. While P/E considers a firm’s equity portion, EV-to-EBITDA determines its total value.

TravelCenters of America Inc. (TA - Free Report) , Celestica Inc. (CLS - Free Report) , Covenant Logistics Group, Inc. (CVLG - Free Report) , YPF Sociedad Anonima (YPF - Free Report) and United Natural Foods, Inc. (UNFI - Free Report) are some stocks with attractive EV-to-EBITDA ratios.

Is EV-to-EBITDA a Better Substitute to P/E?

Also referred to as enterprise multiple, EV-to-EBITDA is the enterprise value (EV) of a stock divided by its earnings before interest, taxes, depreciation and amortization (EBITDA). EV is the sum of a company’s market capitalization, its debt and preferred stock minus cash and cash equivalents. In essence, it is the entire value of a company.

The other component of the multiple, EBITDA, gives a better idea of a company’s profitability as it removes the impact of non-cash expenses like depreciation and amortization that reduce net earnings. It is also often used as a proxy for cash flows.

Generally, the lower the EV-to-EBITDA ratio, the more enticing it is. A low EV-to-EBITDA ratio could indicate that a stock is potentially undervalued.  

EV-to-EBITDA takes into account the debt on a company’s balance sheet that the P/E ratio does not. Due to this reason, EV-to-EBITDA is generally used to value the potential acquisition targets as it shows the amount of debt the acquirer has to assume. Stocks boasting a low EV-to-EBITDA multiple could be seen as attractive takeover candidates.

Another shortcoming of P/E is that it can’t be used to value a loss-making firm. A company’s earnings are also subject to accounting estimates and management manipulation. On the other hand, EV-to-EBITDA is difficult to manipulate and can also be used to value companies making losses but are EBITDA-positive.

EV-to-EBITDA is also a useful tool for evaluating the value of firms that are highly leveraged and have a high degree of depreciation. Moreover, it can be used to compare companies with different levels of debt.

But EV-to-EBITDA has its limitations too. The ratio varies across industries (a high-growth industry typically has a higher multiple and vice versa) and is usually not appropriate while comparing stocks in different industries, given their diverse capital requirements.

As such, a strategy solely based on EV-to-EBITDA might not yield the desired results. But you can club it with the other major ratios in your stock-investing toolbox such as price-to-book (P/B), P/E and price-to-sales (P/S) to screen bargain stocks.

Screening Criteria

Here are the parameters to screen for bargain stocks:

EV-to-EBITDA 12 Months-Most Recent less than X-Industry Median: A lower EV-to-EBITDA ratio represents a cheaper valuation.

P/E using (F1) less than X-Industry Median: This metric screens stocks that are trading at a discount to their peers.

P/B less than X-Industry Median: A lower P/B compared with the industry average implies that the stock is undervalued.

P/S less than X-Industry Median: The lower the P/S ratio, the more attractive the stock is, as investors will have to pay a smaller price for the same amount of sales generated by the company.

Estimated One-Year EPS Growth F(1)/F(0) greater than or equal to X-Industry Median: This parameter will help in screening stocks that have growth rates higher than the industry median. This is a meaningful indicator as decent earnings growth always adds to investor optimism.

Average 20-day Volume greater than or equal to 100,000: The addition of this metric ensures that shares can be traded easily.

Current Price greater than or equal to $5: This parameter will help in screening stocks that are trading at a minimum price of $5 or higher.

Zacks Rank less than or equal to 2: No screening is complete without the Zacks Rank, which has proven its worth since inception. It is a fundamental truth that stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have always managed to beat adversities and outperform the market.

Value Score of less than or equal to 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 upside potential.

Here are our five picks out of the 15 stocks that passed the screen:

TravelCenters of America is the largest publicly traded full-service travel center network in the United States. TA, flaunting a Zacks Rank #1, has a Value Score of A.

TravelCenters of America has expected year-over-year earnings growth of 119.7% for the current year. The Zacks Consensus Estimate for TA’s current-year earnings has been revised 11.8% upward over the last 60 days.

Celestica is one of the largest electronics manufacturing services companies in the world, serving the computer and communications sectors. CLS, a Zacks Rank #1 stock, has a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

Celestica has an expected year-over-year earnings growth rate of 43.1% for the current year. CLS’ consensus estimate for the current year has been revised 9.4% upward over the last 60 days.

Covenant Logistics, together with its subsidiaries, offers a portfolio of transportation and logistics services. CVLG, a Zacks Rank #1 stock, has a Value Score of A.

Covenant Logistics has an expected year-over-year earnings growth rate of 65.7% for the current year. The Zacks Consensus Estimate for CVLG's current-year earnings has been revised 10.1% upward over the last 60 days.

YPF is an international energy company based on the integrated business of hydrocarbons, focused in Latin America, with high standards of efficiency, profitability and responsibility. This Zacks Rank #2 stock has a Value Score of A.

YPF has an expected earnings growth rate of 4,610% for the current year. The consensus estimate for YPF’s current-year earnings has been revised 25.3% upward over the past 60 days.

United Natural Foods is a leading distributor of natural, organic and specialty food and non-food products in the United States and Canada. This Zacks Rank #2 stock has a Value Score of A.

United Natural Foods has an expected year-over-year earnings growth rate of 3.9% for the current fiscal year. UNFI’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, the average being 18.9%.

You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.

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.

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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.

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