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 Magic Software Enterprises Ltd. (MGIC - 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, Magic Software has a trailing twelve months PE ratio of 12.71, as you can see in the chart below:
This level actually compares favorably with the market at large, as the PE for the S&P 500 stands at about 15.3. If we focus on the long-term PE trend, Magic Software’s current PE level puts it below its midpoint (which is 15.91) over the past five years.
Moreover, the stock’s PE also compares unfavorably with the Zacks Computer and Technology sector’s trailing twelve months PE ratio, which stands at 21.09. At the very least, this indicates that the stock is relatively overvalued right now, compared to its peers.
We should also point out that Magic Software has a forward PE ratio (price relative to this year’s earnings) of 11, so it is fair to say that a slightly more value-oriented path may be ahead for Magic Software’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, Magic Software has a P/S ratio of about 1.11. This is substantially lower than the S&P 500 average, which comes in at 2.65 right now. Also, as we can see in the chart below, this is somewhat below the highs for this stock in particular over the past few years.
Broad Value Outlook
In aggregate, Magic Software currently has a Value Score of B putting it into the top 40% of all stocks we cover from this look. This makes Magic Software 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 8.56, which is noticeably better than the industry average of 17.73. Clearly, MGIC is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though Magic Software 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 A and Momentum Score of C. This gives MGIC 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 discouraging. This has had a noticeable impact on the consensus estimate, as the current quarter consensus estimate remained unchanged in the past two months, whereas the current year estimate declined 1.5%.
You can see the consensus estimate trend and recent price action for the stock in the chart below:
Magic Software Enterprises Ltd. Price and Consensus
Owing to such bearish estimate trends, the stock has a Zacks Rank #3 (Hold), which is why we are looking for in-line performance from the company in the near term.
Magic Software is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. However, with a Zacks Rank #3, it is hard to get too excited about this company overall.
So, value investors might want to wait for estimates, analyst sentiment and broader factors to turn around in this name first, but once that happens, this stock could be a compelling pick.
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