5 promising stocks with a price-to-book ratio to buy in August
Value analysis is the best approach to identify good deals. Although the price-to-earnings (P/E) and price-to-sell (P/S) valuation tools are more commonly used for stock picking, the price-to-book ratio (P/B ratio) is also a metric to use to identify low-priced stocks with strong growth prospects.
The P/B ratio, sometimes referred to as the market-to-book ratio, is used to calculate how much an investor should pay for every dollar of a stock’s book value. It is calculated by dividing the current closing share price by the last quarter’s book value per share.
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, Phillips 66 PSX, Turtle Beach Company TO LISTEN, ESA Technology ASX and Signet Jewelers Limited GIS are some of these stocks.
Now let’s understand the concept of book value.
What is the 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 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 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 – such as 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 every 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 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 our five picks from the 16 stocks that qualified the selection:
Turtle Beach is an audio technology company. It designs audio products for the consumer, commercial and healthcare markets. The company markets premium headsets for use with personal computers, mobile devices and video game consoles under the Turtle Beach brand.
Turtle Beach has a Zacks Rank of No. 2 and a Value Score of A. Turtle Beach has an expected 3-5 year EPS growth rate of 16.0%.
Ford engine designs, manufactures, markets and services Lincoln cars, trucks, sport utility vehicles, electrified vehicles and luxury vehicles. In addition to vehicles, the company provides financial services through Ford Motor Credit Company. Ford Motor forecasts an EPS growth rate of 9.10% over 3 to 5 years. F currently has a Zacks Rank #2 and a Value Score of A.
Phillips 66Operations include Refining, Midstream, Marketing and Specialties, and Chemicals. The company, in its current form, emerged from the 2012 spin-off of ConocoPhillips’ downstream business into a separate, independent, publicly traded entity.
Phillips 66 has an expected 3-5 year EPS growth rate of 11.60%. PSX currently has a Zacks Rank #1 and a Value Score of A. You can see the full list of today’s Zacks #1 Rank stocks here
ASE Technology is a provider of semiconductor manufacturing services in the areas of assembly and testing.
ASE Technology forecasts an EPS growth rate of 23.05% over 3 to 5 years. ASE Technology currently has a Zacks Rank #2 and a Value Score of A.
Bookmark Jewelers is a retailer of diamond jewelry, watches and other products. SIG operates in the United States, Canada, United Kingdom, Republic of Ireland and the Channel Islands.
Signet Jewelers forecasts an EPS growth rate of 8% over 3-5 years. Signet Jewelers currently has a Zacks rank #1 and a value score of A.
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