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 KB Home (KBH - 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, KB Home has a trailing twelve months PE ratio of 12.4, 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 about 20. If we focus on the long-term PE trend, KB Home’s current PE level puts it below its midpoint over the past three years.
However, the stock’s PE also compares favorably with the sector’s trailing twelve months PE ratio, which stands at 17.8. At the very least, this indicates that the stock is relatively overvalued right now, compared to its peers.
We should also point out that KB Home has a forward PE ratio (price relative to this year’s earnings) of just 15.6, so it is fair to expect an increase in the company’s share price in the near future.
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, KB Home has a P/S ratio of about 0.5. This is a bit lower than the S&P 500 average, which comes in at 3.3x 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, suggesting some level of undervalued trading—at least compared to historical norms.
Broad Value Outlook
In aggregate, KB Home currently has a Value Score of B, putting it into the top 40% of all stocks we cover from this look. This makes KB Home a solid choice for value investors, and some of its other key metrics make this pretty clear too.
What About the Stock Overall?
Though KB Home 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 Score of D and a Momentum Score of D. This gives KBH a Zacks VGM score — or its overarching fundamental grade — of D. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s recent earnings estimates have been encouraging. The current year has seen six estimates to go higher in the past sixty days compared to two lower, while the next year estimate has seen five up and no down in the same time period.
This has had just a small impact on the consensus estimate though as the current year consensus estimate has dropped by 10.9% in the past two months, while the next year estimate has gone up by 7.1%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
KB Home Price and Consensus
Despite this somewhat mixed trend, the stock has a Zacks Rank #1 (Strong Buy) on the back of its strong value metrics and this is why we are expecting above-average performance from the company in the near-term.
KB Home is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Moreover, a strong industry rank (Top 6% out of more than 250 industries) further strengthens its growth potential.
However, decrease in current quarter earnings estimates raise concern. So, value investors might want to wait for estimates to turn favorable in this name first, but once that happen, this stock could be a compelling pick.
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