Pick These 5 Bargain Stocks With Exciting EV-to-EBITDA Ratios
Value investors are generally fixated on the price-to-earnings (P/E) multiple while seeking stocks that are trading at a bargain. P/E, without a shadow of doubt, is the most-popular multiple used by investors to evaluate the fair market value of a stock. But even this widely-popular valuation metric is not without its pitfalls.
EV-to-EBITDA is a Better Approach, Here’s Why
While P/E is preferred by many investors to uncover value stocks, another valuation metric called EV-to-EBITDA does a better job. The ratio is sometimes viewed as a superior substitute as it offers a clearer picture of a firm’s valuation and its earnings potential. EV-to-EBITDA has a more comprehensive approach to valuation as it determines a firm’s total value. In contrast, P/E just considers the equity portion of a firm.
EV-to-EBITDA is the enterprise value (EV) of a stock divided by its earnings before interest, taxes, depreciation and amortization (EBITDA). EV is the sum of a company’s market capitalization, debt and preferred stock minus cash and cash equivalents.
EBITDA, the other constituent, gives a better idea of a company’s profitability as it removes the impact of non-cash expenses like depreciation and amortization that reduce net earnings. It is also often used as a proxy for cash flows.
Generally, the lower the EV-to-EBITDA ratio, the more attractive it is. A low EV-to-EBITDA ratio could signal that a stock is potentially undervalued.
However, unlike P/E ratio, EV-to-EBITDA takes into account the debt on a company’s balance sheet. For this reason, EV-to-EBITDA is usually used to value possible acquisition targets. Stocks with a low EV-to-EBITDA multiple could be seen as potential takeover candidates.
Another shortcoming of P/E is that it can’t be used to value a loss-making firm. A company’s earnings are also subject to accounting estimates and management manipulation. On the other hand, EV-to-EBITDA is difficult to manipulate and can also be used to value companies that are making loss but are EBITDA-positive.
EV-to-EBITDA is also a useful yardstick in assessing the value of firms that are highly leveraged and have a high degree of depreciation. It can also be used to compare companies with different levels of debt.
But EV-to-EBITDA has its downsides too. It varies across industries and is generally not appropriate while comparing stocks in different industries given their diverse capital spending requirements.
Therefore, instead of just relying on EV-to-EBITDA, you can club it with the other major ratios such as price-to-book (P/B), P/E and price-to-sales (P/S) to achieve the desired results.
Here are the parameters to screen for bargain stocks:
EV-to-EBITDA 12 Months-Most Recent less than X-Industry Median: A lower EV-to-EBITDA ratio represents a cheaper valuation.
P/E using (F1) less than X-Industry Median: This metric screens stocks that are trading at a discount to their peers.
P/B less than X-Industry Median: A lower P/B compared with the industry average implies that the stock is undervalued.
P/S less than X-Industry Median: The lower the P/S ratio, the more attractive the stock is as investors will have to pay a smaller price for the same amount of sales generated by the company.
Estimated One-Year EPS Growth F(1)/F(0) greater than or equal to X-Industry Median: This parameter will help in screening stocks that have growth rates higher than the industry median. This is a meaningful indicator as decent earnings growth always adds to investor optimism.
Average 20-day Volume greater than or equal to 100,000: The addition of this metric ensures that shares can be traded easily.
Current Price greater than or equal to $5: This parameter will help in screening stocks that are trading at a minimum price of $5 or higher.
Zacks Rank less than or equal to 2: No screening is complete without the Zacks Rank, which has proven its worth since inception. It is a fundamental truth that stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have always managed to beat adversities and outperform the market.
Value Score of less than or equal to 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 upside potential.
Here are five of the 12 stocks that passed the screen:
Big Lots, Inc. BIG, through its fully owned subsidiaries, is a discount retailer operating in the United States. This Zacks Rank #1 stock has expected year-over-year earnings growth of 80.9% for the current fiscal year and a Value Score of A.
Qiwi plc QIWI operates as a provider of next-generation payment services primarily in Russia and the CIS. This Zacks Rank #1 stock has an expected year-over-year earnings growth rate of 2.3% for the current year and a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
Cowen Inc. COWN through its operating subsidiaries, provides investment banking, research, sales and trading, prime brokerage, global clearing, investment management and commission management services. This Zacks Rank #1 stock has an expected year-over-year earnings growth rate of 195.5% for the current year and a Value Score of B.
Principal Financial Group, Inc. PFG is a leader in global investment management offering businesses, individuals and institutional clients a wide range of financial products and services. This Zacks Rank #2 stock has a Value Score of A. The Zacks Consensus Estimate for the current year has been revised 7.9% upward over the last 60 days.
Portland General Electric Company POR is an integrated electric utility company engaged in the generation, transmission and distribution of electricity to residential, commercial and industrial customers in Oregon. This Zacks Rank #2 company has an expected year-over-year earnings growth rate of 1.7% for the current year and a Value Score of B.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
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.
Click to get this free report
Big Lots, Inc. (BIG): Free Stock Analysis Report
Portland General Electric Company (POR): Free Stock Analysis Report
Principal Financial Group, Inc. (PFG): Free Stock Analysis Report
Cowen Group, Inc. (COWN): Free Stock Analysis Report
QIWI PLC (QIWI): Free Stock Analysis Report
To read this article on Zacks.com click here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.