Investors interested in stocks from the Outsourcing sector have probably already heard of Convergys (CVG) and Paychex (PAYX). But which of these two stocks presents investors with the better value opportunity right now? Let's take a closer look.
We have found that the best way to discover great value opportunities is to pair a strong Zacks Rank with a great grade in the Value category of our Style Scores system. The Zacks Rank is a proven strategy that targets companies with positive earnings estimate revision trends, while our Style Scores work to grade companies based on specific traits.
Convergys and Paychex are sporting Zacks Ranks of #2 (Buy) and #3 (Hold), respectively, right now. The Zacks Rank favors stocks that have recently seen positive revisions to their earnings estimates, so investors should rest assured that CVG has an improving earnings outlook. However, value investors will care about much more than just this.
Value investors analyze a variety of traditional, tried-and-true metrics to help find companies that they believe are undervalued at their current share price levels.
The Value category of the Style Scores system identifies undervalued companies by looking at a number of key metrics. These include the long-favored P/E ratio, P/S ratio, earnings yield, cash flow per share, and a variety of other fundamentals that help us determine a company's fair value.
CVG currently has a forward P/E ratio of 14.55, while PAYX has a forward P/E of 25.74. We also note that CVG has a PEG ratio of 1.94. This popular metric is similar to the widely-known P/E ratio, with the difference being that the PEG ratio also takes into account the company's expected earnings growth rate. PAYX currently has a PEG ratio of 3.14.
Another notable valuation metric for CVG is its P/B ratio of 1.66. The P/B ratio is used to compare a stock's market value with its book value, which is defined as total assets minus total liabilities. For comparison, PAYX has a P/B of 12.97.
These metrics, and several others, help CVG earn a Value grade of A, while PAYX has been given a Value grade of D.
CVG sticks out from PAYX in both our Zacks Rank and Style Scores models, so value investors will likely feel that CVG is the better option right now.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.