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5 Low Price-to-Book Stocks to Enhance Your Portfolio
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When considering valuation metrics, the price-to-earnings (P/E) ratio has always been the obvious choice, as calculations based on earnings are easy and come in handy. However, in the case of companies that are incurring losses or are in an early cycle of development, generating meager or no profits, price-to-sales (P/S) is a good valuation metric. It helps investors identify cheap stocks.
Other than P/E and P/S, the price-to-book ratio (P/B ratio) is also an easy-to-use tool for zeroing in on low-priced stocks that 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.
The P/B ratio helps to identify low-priced stocks with high growth prospects. General Motors Company (GM - Free Report) , JD.com (JD - Free Report) , KB Home (KBH - Free Report) , Qifu Technology (QFIN - Free Report) and Adtalem Global Education (ATGE - Free Report) are some such stocks.
Now, let us understand the concept of book value.
What is 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 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 warning. 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 is not 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 five of the eight picks that qualified the screening:
Headquartered in Detroit, General Motors is one of the world’s largest automakers. General Motors, along with its strategic partners, produces, sells and services cars, trucks and parts under four core brands — Chevrolet, Buick, GMC and Cadillac. General Motors assembles passenger cars, crossover vehicles, light trucks, sport utility vehicles, vans and other vehicles.
General Motors has a projected 3-5-year EPS growth rate of 9.02%.
Beijing, China-based JD.com operates as an online direct sales company in China. It offers computers, mobile handsets and other digital products, home appliances, automobile accessories, clothing and shoes, luxury goods, including handbags, watches and jewelry, furniture and household products, cosmetics and other personal care items, food and nutritional supplements, books, e-books, music, movies and other media products, mother and childcare products, toys, sports and fitness equipment, and virtual goods.
JD.com has a projected 3-5-year EPS growth rate of 43.75%. JD currently has a Zacks Rank #1 and a Value Score of A.
Based in Los Angeles, CA, KB Home is a well-known homebuilder in the United States and one of the largest in the state. The company’s Homebuilding operations include building and designing homes that cater to first-time, move-up and active adult homebuyers on acquired or developed lands. KB Home also builds attached and detached single-family homes, townhomes and condominiums.
KBH has a projected 3-5-year EPS growth rate of 11.06%. KB Home currently has a Zacks Rank #1 and a Value Score of A.
Qifu Technology is a Credit-Tech platform, principally operating in China. It provides a comprehensive suite of technology services to assist financial institutions and consumers and SMEs in the loan lifecycle, ranging from borrower acquisition, preliminary credit assessment, fund matching and post-facilitation services. Qifu Technology is based in Shanghai, China.
Qifu Technology has a Zacks Rank #1 and a Value Score of A at present. QFIN has a projected 3-5-year EPS growth rate of 9.99%.
Chicago-based Adtalem Global Education is a leading healthcare education provider and workforce solutions innovator. The institutions of the company offer a wide array of programs across medical and healthcare services. Since first-quarter fiscal 2022, Adtalem has been operating through three reportable segments.
Adtalem Global Education has a projected 3-5-year EPS growth rate of 15.0%. ATGE currently has a Zacks Rank #1 and a Value Score of B.
Get the rest of the stocks on the list and start putting 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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5 Low Price-to-Book Stocks to Enhance Your Portfolio
When considering valuation metrics, the price-to-earnings (P/E) ratio has always been the obvious choice, as calculations based on earnings are easy and come in handy. However, in the case of companies that are incurring losses or are in an early cycle of development, generating meager or no profits, price-to-sales (P/S) is a good valuation metric. It helps investors identify cheap stocks.
Other than P/E and P/S, the price-to-book ratio (P/B ratio) is also an easy-to-use tool for zeroing in on low-priced stocks that 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.
The P/B ratio helps to identify low-priced stocks with high growth prospects. General Motors Company (GM - Free Report) , JD.com (JD - Free Report) , KB Home (KBH - Free Report) , Qifu Technology (QFIN - Free Report) and Adtalem Global Education (ATGE - Free Report) are some such stocks.
Now, let us understand the concept of book value.
What is 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 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 warning. 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 is not 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 five of the eight picks that qualified the screening:
Headquartered in Detroit, General Motors is one of the world’s largest automakers. General Motors, along with its strategic partners, produces, sells and services cars, trucks and parts under four core brands — Chevrolet, Buick, GMC and Cadillac. General Motors assembles passenger cars, crossover vehicles, light trucks, sport utility vehicles, vans and other vehicles.
General Motors currently 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.
General Motors has a projected 3-5-year EPS growth rate of 9.02%.
Beijing, China-based JD.com operates as an online direct sales company in China. It offers computers, mobile handsets and other digital products, home appliances, automobile accessories, clothing and shoes, luxury goods, including handbags, watches and jewelry, furniture and household products, cosmetics and other personal care items, food and nutritional supplements, books, e-books, music, movies and other media products, mother and childcare products, toys, sports and fitness equipment, and virtual goods.
JD.com has a projected 3-5-year EPS growth rate of 43.75%. JD currently has a Zacks Rank #1 and a Value Score of A.
Based in Los Angeles, CA, KB Home is a well-known homebuilder in the United States and one of the largest in the state. The company’s Homebuilding operations include building and designing homes that cater to first-time, move-up and active adult homebuyers on acquired or developed lands. KB Home also builds attached and detached single-family homes, townhomes and condominiums.
KBH has a projected 3-5-year EPS growth rate of 11.06%. KB Home currently has a Zacks Rank #1 and a Value Score of A.
Qifu Technology is a Credit-Tech platform, principally operating in China. It provides a comprehensive suite of technology services to assist financial institutions and consumers and SMEs in the loan lifecycle, ranging from borrower acquisition, preliminary credit assessment, fund matching and post-facilitation services. Qifu Technology is based in Shanghai, China.
Qifu Technology has a Zacks Rank #1 and a Value Score of A at present. QFIN has a projected 3-5-year EPS growth rate of 9.99%.
Chicago-based Adtalem Global Education is a leading healthcare education provider and workforce solutions innovator. The institutions of the company offer a wide array of programs across medical and healthcare services. Since first-quarter fiscal 2022, Adtalem has been operating through three reportable segments.
Adtalem Global Education has a projected 3-5-year EPS growth rate of 15.0%. ATGE currently has a Zacks Rank #1 and a Value Score of B.
Get the rest of the stocks on the list and start putting 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