5 Undervalued Price-to-Book Stocks Worth Buying in August

P/B ratio = market capitalization/book value of equity

This metric can help identify attractively priced stocks with upside potential. Some such stocks are BioMarin Pharmaceutical BMRN, Invesco IVZ, Centene Corporation CNC, Hewlett Packard Enterprise HPE and Gibraltar Industries ROCK. Let us understand the concept of book value.

What is Book Value?

There are several ways in which book value can be defined. Book value is the total value that would be left over, according to the company’s balance sheet, if it went bankrupt immediately. In other words, this is what shareholders would theoretically receive if a company liquidated all its assets after paying off all its liabilities.

It is calculated by subtracting total liabilities from the total assets of a company. In most cases, this equates to common stockholders’ equity on the balance sheet. However, depending on the company’s balance sheet, intangible assets should also be subtracted from total assets to determine book value.

Book Value Per Share = (Total Assets – Total Liabilities) ÷ Number of Outstanding Shares

Understanding P/B Ratio

By comparing the book value of equity to its market price, we get an idea of whether a company is under- or overpriced. Like P/E or P/S ratios, it is always better to compare the P/B ratio within industries.

A P/B ratio of less than one means that the stock is trading at less than its book value or the stock is undervalued and, therefore, a good buy. Conversely, a stock with a ratio greater than one can be interpreted as being overvalued or relatively expensive.

For example, a stock with a P/B ratio of 2 means that we pay $2 for every $1 of book value. Thus, the higher the P/B, the more expensive the stock.

But there is a warning. A P/B ratio of less than one can also mean that the company is earning weak or even negative returns on its assets or that the assets are overstated. In such a case, the stock should be shunned because it may be destroying shareholder value. Conversely, the stock’s price may be significantly high — thereby pushing the P/B ratio to more than one — in the likely case that it has become a takeover target, a good enough reason to own the stock.

Moreover, the P/B ratio is not without limitations. It is useful for businesses like finance, investments, insurance and banking or manufacturing companies with many liquid/tangible assets on the books. However, it can be misleading for firms with significant R&D expenditure, high debt, service companies, or those with negative earnings.

In any case, the ratio is not particularly relevant as a standalone number. One should analyze other ratios like P/E, P/S and debt to equity before arriving at a reasonable investment decision.

Screening Parameters

Price to Book (Common Equity) less than X-Industry Median: A lower P/B compared with the industry average implies that there is enough room for the stock to gain.

Price to Sales less than X-Industry Median: The P/S ratio determines how much the market values every dollar of the company’s sales/revenues — a lower ratio than the industry makes the stock attractive.

Price to Earnings using F(1) estimate less than X-Industry Median: The P/E ratio (F1) values a company based on its current share price relative to its estimated earnings per share — a lower ratio than the industry is considered better.

PEG less than 1: PEG links the P/E ratio to the future growth rate of the company. The PEG ratio portrays a more complete picture than the P/E ratio. A value of less than 1 indicates that the stock is undervalued, and investors need to pay less for a stock that has bright earnings growth prospects.

Current Price greater than or equal to $5: They must all be trading at a minimum of $5 or higher.

Average 20-Day Volume greater than or equal to 100,000: A substantial trading volume ensures that the stock is easily tradable.

Zacks Rank less than or equal to #2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform irrespective of the market environment.

Value Score equal to A or 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 opportunities in the value investing space.

5 Low Price-to-Book Stocks

Here are five of the 14 stocks that qualified for the screening: 

San Rafael, CA-based BioMarin focuses on the development and commercialization of treatments for life-threatening severe medical conditions, mainly for children.

BioMarin currently has a Value Score of B and a Zacks Rank #2. BMRN has a projected 3-5-year EPS growth rate of 34.0%.  You can see the complete list of today’s Zacks #1 Rank stocks here.

Headquartered in Atlanta, GA, Invesco Ltd. operates as an independent investment manager and offers a wide range of investment products and services.

IVZ has a Zacks Rank #1 and a Value Score of B. Invesco has a projected 3-5-year EPS growth rate of 22.3%.

St. Louis, MO-based Centene Corporation is a well-diversified, multinational healthcare company that primarily provides a set of services to the government-sponsored healthcare programs. The company serves the underinsured and uninsured individuals through member-focused services. It is also engaged in providing education and outreach programs to inform and assist members in accessing quality, appropriate healthcare services. 

Centene currently has a Zacks Rank #1 and a Value Score of A. CNC has a projected 3-5-year EPS growth rate of 38.2%. 

Headquartered in Houston, TX, Hewlett Packard Enterprise is a global enterprise technology company. It provides hardware, software and services that help businesses store, process and manage data across on-premise, cloud and edge environments. The company serves enterprises, governments, telecom operators and financial institutions in more than 150 countries.

Hewlett Packard currently has a Zacks Rank #2 and a Value Score of B. The company has a projected 3-5-year EPS growth rate of 32.0% 

NY-based Gibraltar Industries manufactures and distributes products to the industrial and building markets. The products range from ventilation and expanded metal to mail storage solutions and rain dispersion products and solutions.

ROCK currently has a Value Score of B and a Zacks Rank #2. Gibraltar Industries has a projected 3-5-year EPS growth rate of 15.0%. 

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This article originally published on Zacks Investment Research (zacks.com).

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