Investors interested in stocks from the Retail - Discount Stores sector have probably already heard of Dollar General (DG - Free Report) and Ross Stores (ROST - Free Report) . But which of these two companies is the best option for those looking for undervalued stocks? Let's take a closer look.
There are plenty of strategies for discovering value stocks, but we have found that pairing a strong Zacks Rank with an impressive grade in the Value category of our Style Scores system produces the best returns. The Zacks Rank is a proven strategy that targets companies with positive earnings estimate revision trends, while our Style Scores work to grade companies based on specific traits.
Right now, Dollar General is sporting a Zacks Rank of #2 (Buy), while Ross Stores has a Zacks Rank of #3 (Hold). This system places an emphasis on companies that have seen positive earnings estimate revisions, so investors should feel comfortable knowing that DG is likely seeing its earnings outlook improve to a greater extent. But this is just one piece of the puzzle for value investors.
Value investors also try to analyze a wide range of traditional figures and metrics to help determine whether a company is undervalued at its current share price levels.
The Style Score Value grade factors in a variety of key fundamental metrics, including the popular P/E ratio, P/S ratio, earnings yield, cash flow per share, and a number of other key stats that are commonly used by value investors.
DG currently has a forward P/E ratio of 23.48, while ROST has a forward P/E of 25.20. We also note that DG has a PEG ratio of 2.05. This popular metric is similar to the widely-known P/E ratio, with the difference being that the PEG ratio also takes into account the company's expected earnings growth rate. ROST currently has a PEG ratio of 2.40.
Another notable valuation metric for DG is its P/B ratio of 5.98. The P/B ratio is used to compare a stock's market value with its book value, which is defined as total assets minus total liabilities. For comparison, ROST has a P/B of 12.61.
These are just a few of the metrics contributing to DG's Value grade of B and ROST's Value grade of C.
DG stands above ROST thanks to its solid earnings outlook, and based on these valuation figures, we also feel that DG is the superior value option right now.