Buy These 5 Price-to-Book Value Stocks in 2022 for Gains
Value investors have over the years preferred the price-to-earnings or P/E ratio as a way to identify value-oriented stocks. However, in the case of loss-making companies that have a negative price-to-earnings ratio, the price-to-sales or P/S ratio is taken into account to determine their true value.
However, the price-to-book ratio (P/B ratio), although used less often, is also an easy-to-use valuation tool for identifying low-priced stocks with excellent returns.
The P/B ratio is calculated as follows:
P/B ratio = market capitalization / book value of equity
The P/B ratio helps identify low-priced stocks that have high growth prospects. Ford Motor Company F, General Motors Society GM, Invesco IVZ, DXC Technology Company DXC and Atlas Corp. ATCO are some of those choices.
What is the 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 getting 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 stock price can be significantly high – thus 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 such as P/E, P/S and debt/equity should be analyzed before making 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: The 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 Score of A or B: Our research shows that stocks with a Value Score of A or B, when combined with a Zacks #1 or 2 ranking, offer the best opportunities in the investment space valuable.
Here are our five picks from the 12 stocks that qualified the selection:
Ford Motor Company designs, manufactures, markets and services Lincoln cars, trucks, sport utility vehicles, electrified vehicles and luxury vehicles.
Ford Motor forecasts an EPS growth rate of 24.7% over 3 to 5 years. Ford Motor currently has a Zacks Rank #1 and a Value Score of A. You can see the full list of today’s Zacks Rank #1 stocks here.
Invesco operates as an independent investment manager and offers a wide range of investment products and services. As of September 30, 2021, Invesco had offices in over 20 countries and an AUM worth $1.53 trillion.
Invesco currently has a Zacks No. 2 ranking and a value score of A. Invesco has an expected EPS growth rate of 13.5% over 3-5 years.
General Motors Company is one of the largest automobile manufacturers in the world. The top US automaker aims to spend more than $27 billion through 2025 to launch next-generation electric vehicles powered by new low-cost batteries. General Motors plans to roll out 11 new electric vehicles as part of its ambitious plans through 2025, including at least 20 new models by 2023.
General Motors has a Zacks rank of No. 2 and a value score of A. Celestica has an expected 3-5 year EPS growth rate of 9.9%.
DXC Technology Company provides information technology services and solutions primarily in North America, Europe, Asia and Australia. DXC Technology Company has a Zacks Rank #2 and a Value Score of A.
DXC Technology Company was formed by the merger of Computer Sciences Corporation (“CSC”) and the business services division of Hewlett Packard Enterprise (“HPE”), which was completed on April 1, 2017. DXC Technology Company has a forecast of 3-5-year EPS growth rate of 27.4%.
Atlas Corp. is an asset management company, which operates as an independent charterer and manager of container ships.
Atlas Corp. forecast an EPS growth rate of 27.9% over 3 to 5 years. Atlas Corp. currently has a Zacks rank #1 and a value score of A.
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