Even in times of such global uncertainty and market volatility, an increasing number of investors come flocking to the equity markets to invest their hard-earned money. And there are a number of investment styles to suit the predilection of hundreds of investors looking for the best value stocks.
Among them, the price-to-book ratio (P/B ratio) is an easy-to-use tool for identifying low-priced stocks which have high-growth prospects.
The P/B ratio is used to calculate how much an investor needs to pay for each dollar of book value of a stock. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share.
Understanding the Basics
First we need to understand what book value is. Book value is the total value that would be left over, according to the company’s books of account, if it were to go bankrupt immediately. In other words, this is what shareholders would theoretically receive if a company liquidated all its assets and paid off all its liabilities.
It is calculated by subtracting total liabilities from total assets of a company. In most cases, that would equate to the common stockholder’s equity on the balance sheet. However, depending on the company’s balance sheet, intangible assets should also be subtracted from total assets to determine the book value.
Now coming back to the P/B ratio, by comparing book value of equity to its market price, we can have a gauge of whether a stock is under- or overpriced. However, like P/E or P/S ratios, it is always better to compare P/B ratios within industries.
A P/B ratio less than 1 means the stock is trading at less than its book value, which can also mean the stock is undervalued. Conversely, a stock with a ratio greater than 1 can be interpreted as being overvalued or relatively expensive.
But there is a caveat. A P/B ratio less that 1 can also mean that the company is earning weak or even negative return on its assets, in which case the stock should be shunned. Conversely, the stock’s share price may be significantly high – thereby pushing the P/B ratio to more than 1 – in the likely case that it has become a takeover target, a good enough reason to own the stock.
Moreover, the P/B ratio is useful for businesses – like finance, investments, insurance and banking – with many liquid/tangible assets on their books. It does not come in handy for firms with large R&D expenditures or high-debt companies or those with negative earnings.
In any case, P/B used in isolation can’t pull off the trick. One should also analyze other ratios like price to earnings, price to sales, and debt to equity before arriving at a reasonable investment decision.
Screening Parameters
Price to Book (common Equity) less than X-Industry Median: A lower P/B compared with the industry average implies that there is enough room for the stock to gain.
Price to Sales less than X-Industry Median: The P/S ratio determines how much the market values every dollar of the company’s sales/revenues — a lower ratio than the industry makes the stock more attractive.
Price to Earnings using F(1) estimate less than X-Industry Median: The P/E ratio (F1) values a company based on its current share price relative to its estimated earnings per share – a lower ratio than the industry is considered better.
PEG less than 1: PEG ratio links the P/E ratio to the future growth rate of the company. PEG ratio portrays a more complete picture than the P/E ratio. A value of less than 1 indicates that the stock is undervalued and investors need to pay less for a stock that has robust earnings growth prospect.
Current Price greater than or equal to $5: They must all be trading at a minimum of $5 or higher.
Average 20-Day Volume greater than or equal to 100,000: A substantial trading volume ensures that the stock is easily tradable.
Zacks Rank less than or equal to #2: Zacks Rank #1 (Strong Buy) or #2 (Buy) stocks are known to outperform irrespective of the market environment.
Value Style Score equal to A or B: Our research shows that stocks with a Value Style Score of ‘A’ or ‘B’ when combined a Zacks Rank #1 or #2 offer the best opportunities in the value investing space.
Here are 5 of the 14 stocks that qualified the screening:
Carnival plc CUK is the world's largest leisure travel and cruise company with operations in North America, Europe, Australia and Asia. The stock currently has a Zacks Rank #2 and a Value score of ‘A.’ The company’s projected 3–5 year EPS growth rate is 17.0%.
Korea Electric Power Corp. KEP, also known as KEPCO, is an integrated electric utility engaged in the generation, transmission and distribution of electricity as well as development of electric power resources in South Korea. This Zacks Rank #2 stock has a 3–5 year EPS growth rate of 25% and a Value score of ‘A.’
Dean Foods Company DF is a leading processor and distributor of milk and other dairy products in the U.S. as well as a leading manufacturer of various specialty food products. The stock currently has a Zacks Rank #1 and a Value score of ‘A.’ The company’s projected 3–5 year EPS growth rate is 12.0%.
CVR Refining, LP CVRR is engaged in the refining of petroleum primarily in the United States. It has refining and related logistics assets that operate in the mid-continent region. This Zacks Rank #1 stock has a 3–5 year EPS growth rate of 18.1% and a Value score of ‘A.’
Companhia de Saneamento Basico do Estado de Sao Paulo, or SABESP SBS, provides public water and sewage services in the state of Sao Paulo, Brazil. The stock currently has a Zacks Rank #2 and a Value score of ‘A.’ The company’s projected 3–5 year EPS growth rate is 29.7%.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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