Investors interested in Retail - Discount Stores stocks are likely familiar with Target (TGT) and Costco (COST). But which of these two companies is the best option for those looking for undervalued stocks? Let's take a closer look.
The best way to find great value stocks is to pair a strong Zacks Rank with an impressive grade in the Value category of our Style Scores system. The proven Zacks Rank puts an emphasis on earnings estimates and estimate revisions, while our Style Scores work to identify stocks with specific traits.
Target and Costco are both sporting a Zacks Rank of # 2 (Buy) right now. Investors should feel comfortable knowing that both of these stocks have an improving earnings outlook since the Zacks Rank favors companies that have witnessed positive analyst estimate revisions. But this is just one factor that value investors are interested in.
Value investors also try to analyze a wide range of traditional figures and metrics to help determine whether a company is undervalued at its 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.
TGT currently has a forward P/E ratio of 16.50, while COST has a forward P/E of 31.40. We also note that TGT has a PEG ratio of 2.45. This metric is used similarly to the famous P/E ratio, but the PEG ratio also takes into account the stock's expected earnings growth rate. COST currently has a PEG ratio of 2.87.
Another notable valuation metric for TGT is its P/B ratio of 4.18. The P/B is a method of comparing a stock's market value to its book value, which is defined as total assets minus total liabilities. By comparison, COST has a P/B of 8.54.
Based on these metrics and many more, TGT holds a Value grade of A, while COST has a Value grade of C.
Both TGT and COST are impressive stocks with solid earnings outlooks, but based on these valuation figures, we feel that TGT is the superior value 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.