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 Aaron's, Inc. (AAN - 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, Aaron's has a trailing twelve months PE ratio of 16.9, 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 17.1. If we focus on the long-term PE trend, Aaron's current PE level puts it slightly above its midpoint over the past five years.
Further, the stock’s PE also compares favorably with the sector’s trailing twelve months PE ratio, which stands at 26.6. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Aaron's has a forward PE ratio (price relative to this year’s earnings) of just 13.0, so it is fair to say that a slightly more value-oriented path may be ahead for Aaron's 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, Aaron's has a P/S ratio of about 1.0. This is lower than the S&P 500 average, which comes in at 3.4 right now. As we can see in the chart below, this is slightly below the highs for this stock in particular over the past few years.
AAN is actually in the higher zone of its trading range in the time period per the 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, Aaron's 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 Aaron's 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 2.1, which is better than the industry average of 3.4. Clearly, AAN is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though Aaron's 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 C and a Momentum score of C. This gives AAN 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 mixed at best. The current quarter has not seen any estimate revisions in the past sixty days, while the full year estimate has seen one upward and zero downward revisions in the same time period.
As a result, the current quarter as well as the full year consensus estimate has remained stable over the past two months. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Despite this somewhat mixed trend, the stock has a Zacks Rank #2 (Buy) on the back of its strong value metrics and this is why we are expecting outperformance from the company in the near-term.
Aaron's is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. With a formidable industry rank (among the Top 25%) and strong Zacks Rank, Aaron's looks like a strong value contender. In fact, over the past two years, the industry has clearly outperformed the broader market, as you can see below:
However, given the mixed trend in earnings estimate revisions, 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.
Will You Make a Fortune on the Shift to Electric Cars?
Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.
With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.
It's not the one you think.
See This Ticker Free >>