5 Undervalued Price-to-Book Stocks to Consider for Your Portfolio

When assessing a company’s valuation, investors typically focus on metrics like the Price-to-Earnings (P/E) and Price-to-Sales (P/S) ratios. The P/E ratio measures a company’s annual earnings relative to its stock price, while the P/S ratio indicates how much investors are paying for each dollar of revenue generated.

Although P/E and P/S are more widely used in stock selection, the Price-to-Book (P/B) ratio is another simple and useful tool for spotting undervalued stocks with strong growth potential. The P/B ratio compares a company’s market value to its book value and is calculated as market capitalization divided by shareholders’ equity.

This metric can help identify attractively priced stocks with upside potential like Sanmina SANM, Mistras Group MG, Strategic Education STRA, Patria Investments Limited PAX and Nexa Resources NEXA.

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 liquidates 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.

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 the screening: 

Headquartered in San Jose, CA, Sanmina Corporation is a global provider of electronics contract manufacturing services. Sanmina has a Zacks Rank #1 and a Value Score of B. SANM has a projected 3-5-year EPS growth rate of 26.0%. You can see the complete list of today’s Zacks #1 Rank stocks here.

New Jersey-based Mistras Group is a global provider of technology-enabled, non-destructive testing solutions used to evaluate the structural integrity of critical energy, industrial and public infrastructure. Mistras Group currently has a Zacks Rank #1 and a Value Score of A. MG has a projected 3-5-year EPS growth rate of 16.0%.

Strategic Education, through its subsidiaries Strayer University and New York Code and Design Academy (NYCDA), provides a range of post-secondary education and other academic programs in the United States. NYCDA is a New York City-based provider of web and application software development courses. Strategic Education has a projected 3-5-year EPS growth rate of 15%.

STRA currently has a Zacks Rank #2 and a Value Score of B.

Based in Grand Cayman, the Cayman Islands, Patria Investments Limited is a private markets investment firm principally in Latin America. It offers asset management services to investors focusing on private equity funds, infrastructure development funds, co-investment funds, constructivist equity funds and real estate and credit funds.

Patria Investments Limited has a Zacks Rank #2 and a Value Score of A. PAX has a projected 3-5-year EPS growth rate of 15.76%.

Based in Luxembourg City, Nexa Resources S.A. is an integrated zinc producer. It engaged in developing and operating mining and smelting assets primarily in Latin America. Nexa Resources has a projected 3-5-year EPS growth rate of 51.17%.

NEXA currently has a Zacks Rank #1 and a Value Score of A.

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

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