In value investing, it is a common practice to pick stocks that are cheap but fundamentally strong. There are a number of investment styles to suit the predilection of hundreds of investors looking for the best value stocks.
Among them, the price-to-book ratio (P/B ratio) is an easy-to-use tool for identifying low-priced stocks, which have high-growth prospects.
The P/B ratio is used to calculate how much an investor needs to pay for each dollar of book value of a stock. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share.
P/B ratio = market capitalization/book value of equity.
The P/B ratio helps to identify low-priced stocks that have high growth prospects.
Select Medical Holdings Corporation ( SEM Quick Quote SEM - Free Report) , General Motors Company ( GM Quick Quote GM - Free Report) , KB Financial Group ( KB Quick Quote KB - Free Report) , StoneCo Ltd. ( STNE Quick Quote STNE - Free Report) and Corebridge Financial ( CRBG Quick Quote CRBG - Free Report) are some such stocks.
Now let us understand the concept of book value.
Understanding Book Value?
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 the common stockholders’ equity on the balance sheet. However, depending on the company’s balance sheet, intangible assets should also be subtracted from the 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 of 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 nine stocks that qualified the screening:
Select Medical is a healthcare company, which owns long-term acute care and inpatient rehabilitation hospitals, as well as occupational health and physical therapy clinics. Select Medical has a Zacks Rank #2 and a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
SEM has a projected 3-5-year EPS growth rate of 23.41%.
General Motors Company is one of the world’s largest automakers. From going bankrupt in 2009 to becoming one of the world’s best-run car companies, General Motors has come a long way. General Motors held the largest share of the U.S. auto market at 16% in 2022
General Motors Company has a Zacks Rank #2 and a Value Score of A. The company has a projected 3-5-year EPS growth rate of 9.85%.
KB Financial Group is a commercial bank in Korea. The company provides credit and related financial services mainly to individuals and small and medium-sized enterprises. It also provides a range of deposit products and related services to individuals and enterprises of all sizes.
KB Financial Group has a projected 3–5-year EPS growth rate of 12.46%. KB currently has a Zacks Rank #2 and a Value Score of A.
StoneCo provides financial technology solutions. The company offers an end-to-end cloud-based technology platform to conduct electronic commerce across in-store, online and mobile channels. StoneCo is based in Sao Paulo, Brazil.
STNE has a Zacks Rank #2 and a Value Score of A. STNE has a projected 3–5-year EPS growth rate of 55.15%.
Based in New York,
Corebridge Financial provides retirement solutions and insurance products, principally in the United States.
Corebridge Financial has a projected 3-5-year EPS growth rate of 21.10%. CRBG currently has a Zacks Rank #2 and a Value Score of A.
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