Investors looking for stocks in the Utility - Electric Power sector might want to consider either FirstEnergy (FE) or American Electric Power (AEP). But which of these two stocks is more attractive to value investors? We'll need to take a closer look to find out.
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.
FirstEnergy has a Zacks Rank of #2 (Buy), while American Electric Power has a Zacks Rank of #3 (Hold) right now. The Zacks Rank favors stocks that have recently seen positive revisions to their earnings estimates, so investors should rest assured that FE has an improving earnings outlook. But this is only part of the picture for value investors.
Value investors also tend to look at a number of traditional, tried-and-true figures to help them find stocks 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.
FE currently has a forward P/E ratio of 18.66, while AEP has a forward P/E of 21.11. We also note that FE has a PEG ratio of 2.89. This figure is similar to the commonly-used P/E ratio, with the PEG ratio also factoring in a company's expected earnings growth rate. AEP currently has a PEG ratio of 3.14.
Another notable valuation metric for FE is its P/B ratio of 2.11. 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, AEP has a P/B of 2.24.
These metrics, and several others, help FE earn a Value grade of B, while AEP has been given a Value grade of C.
FE has seen stronger estimate revision activity and sports more attractive valuation metrics than AEP, so it seems like value investors will conclude that FE is the superior option right now.
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This article originally published on Zacks Investment Research (zacks.com).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
