Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn't want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?
One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let's put Ciena CorporationCIEN stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:
A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock's current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.
On this front, Ciena has a trailing twelve months PE ratio of 19.1, as you can see in the chart below:
An often overlooked ratio that can still be a great indicator of value is the price/cash flow metric. This ratio doesn't take amortization and depreciation into account, so can give a more accurate picture of the financial health in a business. This is a preferred metric to some valuation investors because cash flows are (a) generally less prone to manipulation by the company's management and (b) are less affected by variation in accounting policies between different companies.
The ratio is generally applied to find out whether a company's stock is overpriced or underpriced with reference to its cash flows generation potential compared with its competitors. However, it is not commonly used for cross-industry comparison, as the average price to cash flow ratio varies from industry to industry.
In this case, Ciena's P/CF ratio of 13.5 is lower than the Zacks classified Fiber Optics industry average of 14.6, which indicates that the stock is somewhat undervalued in this respect.
Broad Value Outlook
In aggregate, Ciena currently has a Zacks Value Style Score of 'B', putting it into the top 40% of all stocks we cover from this look. This makes Ciena a solid choice for value investors, and some of its other key metrics make this pretty clear too.
For example, the P/S ratio (another great indicator of value) comes in at 1.11, which is far better than the industry average of 1.89. Clearly, CIEN is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though Ciena might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of 'B' and a Momentum score of 'D'. This gives CIEN a Zacks VGM score-or its overarching fundamental grade-of 'B'. (You can read more about the Zacks Style Scores here >> )
Meanwhile, the company's recent earnings estimates have not been encouraging. The current quarter has seen no estimates going higher in the past sixty days compared to three lower, while the full year estimate has seen one up and one down in the same time period.
As a result, the current quarter consensus estimate has fallen by 12.1% in the past two months, while the full year estimate has declined by 2.8%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Ciena Corporation Price and Consensus
Notably, the stock has a long term expected earnings growth of 15.3% and sports a Zacks Rank #3 (Hold). These mixed expectations indicate that while the stock's growth story might be good over the long term, analysts have some apprehensions about the stock in the immediate future. Thus, we are looking for in-line performance from the company in the near term.
Ciena is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. With a top industry rank (top 46% out of more than 250 industries) and a Zacks Rank #3, it is hard to get too excited about this company overall. In fact, over the past three years, the Zacks Fiber Optics industry has clearly underperformed the broader market, as you can see below:
Looking for Ideas with Even Greater Upside?
Today's investment ideas are short-term, directly based on our proven 1 to 3 month indicator. In addition, I invite you to consider our long-term opportunities. These rare trades look to start fast with strong Zacks Ranks, but carry through with double and triple-digit profit potential. Starting now, you can look inside our home run, value, and stocks under $10 portfolios, plus more. Click here for a peek at this private information >>
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.