Top 5 Bargain P/B Stocks Investors Should Watch Now

The price-to-book ratio, or P/B ratio, is the ratio of a stock's price to its book value, i.e., how much an investor needs to pay for each dollar of a stock's book value. It is calculated by dividing the current closing price of the stock by the book value per share.

In value investing, it is a common practice to pick stocks that are cheap but fundamentally strong. There are a number of investment styles for finding great stocks at attractive values.

While considering valuation metrics, though price-to-earnings and price-to-sales are the first choices, the P/B ratio is also emerging as a convenient tool for identifying low-priced stocks that have high-growth prospects.

Here’s the formula for P/B ratio:

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

The P/B ratio helps to identify low-priced stocks that have high-growth prospects. The AES Corporation AES, Harmony Biosciences HRMY, Concentrix CNXC, Patria Investments Limited PAX and Global Payments GPN are some such picks.

Now, 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 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 11 stocks that qualified the screening: 

Arlington, VA-based AES is a global power company. The company’s businesses are spread across four continents in 14 countries.

AES has a Zacks Rank #2 and a Value Score of A. AES has a projected 3-5-year EPS growth rate of 11.2%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Headquartered in Plymouth Meeting, PA, Harmony Biosciences is a pharmaceutical company making therapies for rare neurological disorders. Harmony Biosciences currently has a Zacks Rank of 1. 

HRMY has a Value Score of A and a projected 3-5-year EPS growth rate of 27.11%.

Based in Newark, CA, Concentrix Corporation provides technology-enabled business services. Concentrix has a projected3-5-year EPS growth rate of 8.76%.

CNXC currently has a Zacks Rank #2 and a Value Score of A.

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%.

Headquartered in Atlanta, GA, Global Payments is a leading payment technology and software company that provides payment processing technology and software solutions to merchants, financial institutions, and consumers worldwide.

GPN presently has a Zacks Rank #2 and a Value Score of A. The company has a projected 3-5-year EPS growth rate of 11.54%.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

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

Zacks Investment Research