Every investor has an idea about investments. Some target stocks that soar on the back of positive sentiment in the market, and shun these when the market loses momentum. Some investors target stocks with higher earnings and revenue growth potential along with the ability to generate impressive cash flow compared with industry peers. Again, there are investors who look for intrinsic value in stocks.
Investment in stocks made on the basis of a diligent value analysis is usually considered to be one of the best practices. The concept is that you have to target those stocks that are trading below their inherent value. These are generally undervalued stocks, in spite of having strong fundamentals. Basically, value investing is an opportunity for risk-averse investors to enter the market and grab stocks that have been overlooked by the majority, and are therefore trading at cheap multiples but are not devoid of potential.
The market has a tendency to react to good and bad news, resulting in stock price movements that may not truly reflect the company's long-term fundamentals. In such a scenario, your returns will depend on selecting the true value stocks. These value stocks are generally unappreciated or trading at a bargain price, and could fetch higher returns on market correction.
How to Identify?
Warren Buffet said “It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. So what are the criteria to identify value stocks? A value stock may have a high dividend yield, low price-to-book ratio, low price-to-earnings ratio or a low price-to-sales ratio. However, it might be difficult for one to look at each parameter and compare with the peer group for an analysis on whether the stock is attractive from the value perspective. To make the task easy, Zacks has designed the new Style Score System.
The attractiveness of a stock as an investment option is confirmed by its Value Style Score of “A” (or “B”). The Value Style Score condenses all valuation metrics into one actionable score that helps investors steer clear of ‘value traps’ and identify stocks that are truly trading at a discount. Our research shows that stocks with Style Scores of A or B when combined with a Zacks Rank #1 (Strong Buy) or #2 (Buy) offer the best upside potential.
Why the Retail Sector?
Here we have identified 3 Retail stocks that have a favorable combination of a solid Zacks Rank and a sound Value Score that may boost one’s portfolio and provide an above-average return on investments. The retail sector is ought to be in focus, given the gradual recovery in the housing market, the strengthening manufacturing sector, an improving labor market and lower gasoline prices. Moreover, consumer confidence – a key determinant of financial health – is also improving, making the future look brighter.
3 Value Picks
We suggest investing in Express, Inc. EXPR, a specialty apparel and accessories retailer, with a Value Score of “A” and a Zacks Rank #1. The company possesses a P/E of 15.55x and P/S of 0.71x. Compared to the industry at large, this is pretty favorable as the overall space has an average P/E and P/S of 19.40x and 0.82x, respectively. The company has also been witnessing solid earnings estimate revisions over the past 30 days.
Target Corp. TGT, which operates as a general merchandise retailer, is another solid bet, with a Value Score of “A” and a Zacks Rank #2. The company has a P/E of 18.09x and P/B of 3.75x, which are trading at a discount to the industry average P/E and P/B of 23.13x and 4.81x, respectively. The stock has also been enjoying positive estimate revisions over the past 60 days.
Another Zacks Rank #2 stock that investors may look forward to is Big 5 Sporting Goods Corp. BGFV, with a Value Score of “A.” This sporting goods retailer possesses a P/B of 1.66x and P/S of 0.33x. Compare this to the industry average of 2.63x and 0.79x, respectively, and it will be safe to consider the stock as adequately undervalued versus its peers, at least on the basis of these metrics. The Zacks Consensus Estimate too has trended upward over the past 60 days.
Bottom Line
Investors can confidently end their search at stocks with a better Zacks Rank status of either #1 or #2, which encompasses its strong fundamentals, promises price movement and highlights analysts’ constructive view on the same via positive estimate revisions. A sturdy portfolio always gives favorable returns.
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
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