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 Methode Electronics, Inc. (MEI - 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, Methode Electronics has a trailing twelve months PE ratio of 18.2, 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 stands at 20.7. As we can see, the stock is trading at its median value. This does not provide us with a conclusive direction as to the relative valuation of the stock in comparison to its historical trend.
Further, the stock’s PE also compares favorably with its industry’s trailing twelve months PE ratio, which stands at 27.3. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Methode Electronics has a forward PE ratio (price relative to this year’s earnings) of 18.2, which is roughly in line with the current level. Hence the forward earnings estimates are already incorporated in the company’s current share price.
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, Methode Electronics has a P/S ratio of about 2.1. This is lower than the S&P 500 average, which comes in at 3.3 right now. However, as we can see in the chart below, this is around the highs for this stock in particular over the past few years.
If anything, Methode Electronics is towards the higher end of its range in the time period from a P/S metric, which suggests that the company’s stock price has already appreciated to some degree, relative to its sales.
Broad Value Outlook
In aggregate, Methode Electronics 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 Methode Electronics a solid choice for value investors.
For example, the PEG ratio for Methode Electronics is 1.2, a level that is lower than the industry average of 2. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Clearly, MEI is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though Methode Electronics 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 B and a Momentum score of F. This gives MEI a Zacks VGM score—or its overarching fundamental grade—of A. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s recent earnings estimates have been encouraging. The current quarter and year has seen one estimate go higher in the past thirty days compared to none lower.
As a result, the consensus estimate for the current year has risen by 1.6% in the past month, while the next year estimate has inched higher by 1.7%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Methode Electronics, Inc. Price and Consensus
This bullish trend is why the stock boasts a Zacks Rank #1 (Strong Buy) and why we are expecting outperformance from the company in the near term.
Methode Electronics is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. With a good industry rank (among the Top 3%) and strong Zacks Rank, Methode Electronics looks like a strong value contender. In fact, over the past six months, its industry has clearly outperformed the broader market, as you can see below:
So, it might pay for value investors to delve deeper into the company’s prospects, as fundamentals indicate that this stock could be a compelling pick.
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