Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?
One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put The Gap, Inc. (GPS - Free Report) stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:
A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.
On this front, Gap has a trailing twelve months PE ratio of 11.17. This level compares pretty favorably with the market at large, as the PE ratio for the S&P 500 comes in at about 20.29.
If we focus on the long-term trend of the stock, the current level puts Gap’s current PE among its lows over the past five years. This suggests that the stock is undervalued compared to its own historical levels and thus it could prove to be a suitable entry point from a PE perspective.
Further, the stock’s PE also compares favorably with the Zacks classified Retail - Apparel and Shoes industry’s trailing twelve months PE ratio, which stands at 17.22. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers. In fact, the stock has historically been undervalued than its peers over a major part of the observed period.
We should also point out that Gap has a forward PE ratio (price relative to this year’s earnings) of 11.60 – which is slightly higher than the current figure. This is because analysts expect earnings to decrease in 2017.
Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.
Right now, Gap has a P/S ratio of about 0.60. This is faintly higher than the Zacks categorized Retail - Apparel and Shoes industry average, which comes in at 0.57 right now. Also, as we can see in the chart below, this is well below the highs for this stock in particular over the past few years.
If anything, GPS is in the lower end of its range in the time period from a P/S metric, suggesting some level of undervalued trading—at least compared to historical norms.
Broad Value Outlook
In aggregate, Gap currently has a Zacks Value Style Score of ‘A’, putting it into the top 20% of all stocks we cover from this look. This makes Gap a solid choice for value investors, and some of its other key metrics make this pretty clear too.
For example, its P/CF ratio (another great indicator of value) comes in at 7.36, which is slightly better than the industry average of 7.43. Clearly, GPS is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though Gap might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘A’ and a Momentum score of ‘D’. This gives GPS a Zacks VGM score—or its overarching fundamental grade—of ‘A’. (You can read more about the Zacks Style Scores here >>)
Our VGM Score identifies stocks that have the most attractive value, growth, and momentum characteristics, and a good VGM score can increase your odds of success. All things considered, Gap seems to have pretty striking prospects.
However, the company’s recent earnings estimates have been mixed at best. The current quarter has seen no estimates go higher in the past thirty days compared to 10 lower, while the full year estimate has seen six upward revisions and two downward revisions in the same time period.
This has had a small but meaningful impact on the consensus estimate as the current quarter consensus estimate has moved south by 7.1%, while the full year estimate has inched higher by 0.5%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Gap, Inc. (The) Price and Consensus
This somewhat mixed trend is why the stock has just a Zacks Rank #3 (Hold) despite strong value metrics and why we are looking for in-line performance from the company in the near term.
Gap is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. However, with a sluggish industry rank (Bottom 7% out of more than 250 industries) and a Zacks Rank #3, it is hard to get too excited about this company overall. In fact, over the past two years, the Zacks Retail - Apparel and Shoes industry has clearly underperformed the broader market, as you can see below:
Nevertheless, Gap remains committed to positioning itself better for long-term growth by setting its priorities right and channelizing its resources accordingly, as is evident from its latest strategic plan. So, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.
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