5 Low Price-to-Book Stocks to Buy in the New Year
The price-to-book (P/B) ratio is widely favored by value-oriented investors to identify low-priced stocks offering exceptional returns. The ratio is used to compare the market value/price of a stock to its book value.
The P/B ratio is calculated as follows:
P/B ratio = market price per share / book value of equity per share
The P/B ratio reflects the number of times investors’ book value is willing to pay for a stock. So, if the stock price is $10 and the equity book value is $5, investors are willing to pay double the book value. Ideally, a P/B value below 1.0 is considered good, indicating a potentially undervalued stock. However, value investors often consider stocks with a P/B value below 3.0.
Now let’s understand the concept of book value.
What is book value?
There are several ways to define book value. Book value is the total value that would remain, according to the company’s balance sheet, if it went bankrupt immediately. In other words, it’s what shareholders would theoretically receive if a company liquidated all of its assets after settling all of its liabilities.
It is calculated by subtracting the total liabilities from the total assets of a business. In most cases, this equates to common shareholders’ equity on the balance sheet. However, according to the company’s balance sheet, intangible assets must also be subtracted from total assets to determine book value.
Understanding the P/B ratio
By comparing the book value of equity to its market price, we get an idea if a company is undervalued or overvalued. However, like the P/E or P/S ratio, it is always best to compare P/B ratios within industries.
An AP/B ratio of less than one means the stock is trading at a price below its book value, or the stock is undervalued and therefore a good buy. Conversely, a stock with a ratio greater than one can be interpreted as being overvalued or relatively expensive.
For example, a stock with a P/B ratio of 2 means we pay $2 for every $1 of book value. Thus, the higher the P/B, the more expensive the stock.
But there is a caveat. An AP/B ratio of less than one can also mean that the company is earning low or even negative returns on its assets, or that the assets are overvalued, in which case the stock should be avoided as it can destroy shareholder value. Conversely, the price of the stock may be significantly high – thereby pushing the P/B ratio to more than one – in the likely event that it has become a buyout target, reason enough to hold the stock. .
Moreover, the P/B ratio is not without limits. It is useful for businesses – like finance, investments, insurance and banking or manufacturing companies – with many liquid/tangible assets on the books. However, this can be misleading for companies with large R&D expenses, high debt, service companies, or those with negative earnings.
In any case, the ratio is not particularly relevant as a stand-alone number. Other ratios like P/E, P/S and debt to equity should be analyzed before arriving at a reasonable investment decision.
Price to Book (common Equity) below the X-Industry median:A lower P/B relative to the industry average implies that there is enough room for the stock to win.
Selling price below median X-Industry:The P/S ratio determines how much the market values each dollar of the company’s sales/revenue – a lower ratio than the industry makes the stock attractive.
Price/earnings ratio using F(1) estimate below industry median X: The P/E (F1) ratio 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 relates the P/E ratio to the future growth rate of the company. The PEG ratio gives a more complete picture than the P/E ratio. A value below 1 indicates the stock is undervalued and investors should pay less for a stock that offers good earnings growth prospects.
Current price greater than or equal to $5: They must all trade at a minimum of $5 or more.
Average volume over 20 days greater than or equal to 100,000:Substantial trading volume ensures that the stock is easily tradable.
Zacks rating less than or equal to #2:Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform regardless of the market environment.
Value Rating Equal to A or B: Our research shows that stocks with a value score of A or B when combined with a Zacks rank #1 or 2 offer the best opportunities in the value investing space.
Here are five of the seven actions that qualified the screening:
Laboratory Corporation of America Holdings LH, a clinical laboratory company, has a 3-5 year EPS growth rate of 10.2%. He currently has a Zacks rank #2 and a value score of B. You can see the full list of today’s Zacks #1 Rank stocks here.
Honda Motor Co., Ltd. HMC, a major automaker based in Japan, forecasts an EPS growth rate of 19.2% over 3 to 5 years. He currently has a Zacks rank #1 and a value score of A.
Boise Cascade Company BCC, a wood products manufacturer and building materials distributor, is currently a No. 2 ranked Zacks stock. It has a 3-5 year EPS growth rate of 10.2% and a value score of A.
The ODP company ODP, a leading business services provider, currently has a Zacks #1 ranking and a value score of A. It has a 3-5 year EPS growth rate of 6.8%
General Motors Company GM, a leading automotive company, currently has a Zacks #1 ranking and a value score of A. It has a 3-5 year EPS growth rate of 9.9%
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