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 China Telecom Corp Ltd (CHA - 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, China Telecom has a trailing twelve months PE ratio of 14.36, as you can see in the chart below:
This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 compares in at about 20.09. If we focus on the stock’s long-term PE trend, the current level puts China Telecom’s current PE ratio below its midpoint over the past five years, with the number having risen rapidly over the past few months.
Further, the stock’s PE also compares favorably with the broader industry’s trailing twelve months PE ratio, which stands at 26.13. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that China Telecom has a forward PE ratio (price relative to this year’s earnings) of just 12.94, so it is fair to say that a slightly more value-oriented path may be ahead for China Telecom stock in the near term too.
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, China Telecom has a P/S ratio of just 0.73. This is significantly lower than the S&P 500 average, which comes in at 3.24 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, CHA 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, China Telecom currently has a Value Style Score of ‘A’, putting it into the top 20% of all stocks we cover from this look. This makes China Telecom a solid choice for value investors, and some of its other key metrics make this pretty clear too.
For example China Telecom’s P/CF ratio (another great indicator of value) comes in at 3.01, which is much lower than the industry average of 5.49. Clearly, CHA is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though China Telecom 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 ‘D’ and a Momentum score of ‘D’. This gives CHA a VGM score—or its overarching fundamental grade—of ‘B’. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s recent earnings estimates have been favorable. Both the current year and next year have seen one estimate go higher in the past sixty days compared to no lower.
This has had just a small impact on the consensus estimate though as both the current year and next year consensus estimate has risen by 1% in the past two months. You can see the consensus estimate trend and recent price action for the stock in the chart below:
China Telecom Corp Ltd Price and Consensus
This positive trend signifies bullish analyst sentiment, and its Zacks Rank #2 (Buy) indicates robust fundamentals and expectations of outperformance in the near term.
China Telecom is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Furthermore, a top industry rank (among Top 4% of more than 250 industries) and a Zacks Rank #2 instills investor confidence on the stock.
On the flipside, over the past two years, the broader industry has clearly underperformed the broader market, as you can see below:
We believe, despite an unsatisfactory past industry performance, a good industry and Zacks rank signal that the stock is likely to benefit from favorable broader factors in the immediate future. Add to this robust value metrics, and we believe that we have a strong value contender in China Telecom.
One Simple Trading Idea
Since 1988, the Zacks system has more than doubled the S&P 500 with an average gain of +25% per year. With compounding, rebalancing, and exclusive of fees, it can turn thousands into millions of dollars.
This proven stock-picking system is grounded on a single big idea that can be fortune shaping and life changing. You can apply it to your portfolio starting today.
Learn more >>