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 Huaneng Power International, Inc.HNP 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, Huaneng Power has a trailing twelve months PE ratio of 7.42, as you can see in the chart below:
This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 stands at about 20.12. If we focus on the long-term PE trend, Huaneng Power's current PE level puts it below its midpoint (which stands at 8.87) over the past five years. Moreover, the current level is significantly below the highs for this stock, suggesting it might be a good entry point.
Another key metric to note is the Price/Sales ratio. This approach compares a given stock's price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.
Right now, Huaneng Power has a P/S ratio of about 0.64. This is way lower than the S&P 500 average, which comes in at 3.17 right now. Also, as we can see in the chart below, this is slightly below the midpoint for this stock in particular over the past few years.
This decidedly bearish trend is why the stock has just a Zacks Rank #3 (Hold) in spite of solid value metrics. This rank indicates that we are looking for in-line performance from the company in the near term.
Huaneng Power is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. However, with a sluggish industry rank (Bottom 46% out of more than 250 industries) and a Zacks Rank #3 (Hold), it is hard to get too excited about this company overall.
In fact, over the past one year, the Zacks categorized Utility-Electric Power industry has clearly underperformed the broader market, as you can see below:
So, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.
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