Buy These 5 Stocks With Low P/B Ratio in April

In value investing, it is a common practice to pick stocks that are cheap but fundamentally strong. There are a number of investment styles for finding great stocks at attractive values.

While considering valuation metrics, though price-to-earnings and price-to-sales are the first choices, the P/B ratio is also emerging as a convenient tool for identifying low-priced stocks that have high-growth prospects.

Price-to-book ratio or P/B ratio is essentially the ratio of stock price to book value, i.e., how much an investor needs to pay for each dollar of the book value of a stock. It is calculated by dividing the current closing price of the stock by the book value per share.

Here’s the formula for P/B ratio:

P/B ratio = market capitalization/book value of equity.

The P/B ratio helps to identify low-priced stocks with high growth prospects. General Motors Company GM, Unum Group UNM, KB Home KBH, Qifu Technology QFIN and Affiliated Managers Group AMG are some such stocks.

Now, let us understand the concept of book value.

What is Book Value?

There are several ways by which book value can be defined. Book value is the total value that would be left over, according to the company’s balance sheet, if it goes bankrupt immediately. In other words, this is what shareholders would theoretically receive if a company liquidates all its assets after paying off all its liabilities.

It is calculated by subtracting total liabilities from the total assets of a company. In most cases, this equates to common stockholders’ equity on the balance sheet. However, depending on the company’s balance sheet, intangible assets should also be subtracted from the total assets to determine book value.

Understanding P/B Ratio

By comparing the book value of equity to its market price, we get an idea of whether a company is under or overpriced. However, like P/E or P/S ratio, it is always better to compare P/B ratios within industries.

A P/B ratio of less than one means that the stock is trading at less than 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 that we pay $2 for every $1 of book value. Thus, the higher the P/B, the more expensive the stock.

But there is a warning. A P/B ratio of less than one can also mean that the company is earning weak or even negative returns on its assets or that the assets are overstated, in which case the stock should be shunned because it may be destroying shareholder value. Conversely, the stock’s price may be significantly high — thereby pushing the P/B ratio to more than one — 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 not without limitations. It is useful for businesses like finance, investments, insurance and banking or manufacturing companies with many liquid/tangible assets on the books. However, it can be misleading for firms with significant R&D expenditure, high debt, service companies, or those with negative earnings.

In any case, the ratio is not particularly relevant as a standalone number. One should analyze other ratios like P/E, P/S 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 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 links the P/E ratio to the future growth rate of the company. The 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 bright earnings growth prospects.

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 Score 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 13 picks that qualified the screening: 

Headquartered in Detroit, General Motors is one of the world’s largest automakers. General Motors, along with its strategic partners, produces, sells and services cars, trucks and parts under four core brands — Chevrolet, Buick, GMC and Cadillac. General Motors assembles passenger cars, crossover vehicles, light trucks, sport utility vehicles, vans and other vehicles.

General Motors currently has a Zacks Rank #2 and a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

General Motors has a projected 3-5-year EPS growth rate of 9.02%.

Headquartered in Chattanooga, TN, Unum Group was created following the June 1999 merger of Provident Companies, Inc. and Unum Corporation. Along with disability insurance, the company provides long-term care insurance, life insurance, employer- and employee-paid group benefits and related services.

Unum Group has a projected 3-5-year EPS growth rate of 8.34%. UNM currently has a Zacks Rank #2 and a Value Score of A. 

Based in Los Angeles, CA, KB Home is a well-known homebuilder in the United States and one of the largest in the state. The company’s Homebuilding operations include building and designing homes that cater to first-time, move-up and active adult homebuyers on acquired or developed lands. KB Home also builds attached and detached single-family homes, townhomes and condominiums.

KBH has a projected 3-5-year EPS growth rate of 11.06%. KB Home currently has a Zacks Rank #2 and a Value Score of A. 

Qifu Technology is a Credit-Tech platform principally in China, which provides a comprehensive suite of technology services to assist financial institutions and consumers and SMEs in the loan lifecycle, ranging from borrower acquisition, preliminary credit assessment, fund matching and post-facilitation services. Qifu Technology is based in Shanghai, China.

Qifu Technology has a Zacks Rank #1 and a Value Score of A at present. QFIN has a projected 3-5-year EPS growth rate of 9.99%.

Headquartered in Massachusetts, Affiliated Managers Group is a global asset manager with equity investments in a large group of investment management firms or affiliates.

On the whole, the affiliates manage more than 500 investment products across each major product category — global, international and emerging markets equities, domestic equities, and alternative and fixed-income products.

Affiliated Managers Group has a projected 3-5-year EPS growth rate of 12.81%. AMG currently has a Zacks Rank #2 and a Value Score of A. 

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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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Unum Group (UNM) : Free Stock Analysis Report

General Motors Company (GM) : Free Stock Analysis Report

KB Home (KBH) : Free Stock Analysis Report

Affiliated Managers Group, Inc. (AMG) : Free Stock Analysis Report

Qifu Technology, Inc. (QFIN) : Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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