Investors interested in stocks from the Retail - Apparel and Shoes sector have probably already heard of Gap (GPS - Free Report) and American Eagle Outfitters (AEO - Free Report) . But which of these two companies is the best option for those looking for undervalued stocks? Let's take a closer look.
We have found that the best way to discover great value opportunities is to pair a strong Zacks Rank with a great grade in the Value category of our Style Scores system. The proven Zacks Rank puts an emphasis on earnings estimates and estimate revisions, while our Style Scores work to identify stocks with specific traits.
Right now, both Gap and American Eagle Outfitters are sporting a Zacks Rank of # 2 (Buy). The Zacks Rank favors stocks that have recently seen positive revisions to their earnings estimates, so investors should rest assured that both of these companies have improving earnings outlooks. But this is just one piece of the puzzle for value investors.
Value investors also tend to look at a number of traditional, tried-and-true figures to help them find stocks that they believe are undervalued at their current share price levels.
Our Value category grades stocks based on a number of key metrics, including the tried-and-true P/E ratio, the P/S ratio, earnings yield, and cash flow per share, as well as a variety of other fundamentals that value investors frequently use.
GPS currently has a forward P/E ratio of 11.88, while AEO has a forward P/E of 17.28. We also note that GPS has a PEG ratio of 1.32. This figure is similar to the commonly-used P/E ratio, with the PEG ratio also factoring in a company's expected earnings growth rate. AEO currently has a PEG ratio of 2.17.
Another notable valuation metric for GPS is its P/B ratio of 3.72. The P/B is a method of comparing a stock's market value to its book value, which is defined as total assets minus total liabilities. By comparison, AEO has a P/B of 3.84.
These are just a few of the metrics contributing to GPS's Value grade of B and AEO's Value grade of C.
Both GPS and AEO are impressive stocks with solid earnings outlooks, but based on these valuation figures, we feel that GPS is the superior value option right now.