Boost Your Portfolio With These 5 Low Price-to-Book Stocks

When considering valuation metrics, the price-to-earnings (P/E) ratio has always been the obvious choice as calculations based on earnings are easy and come in handy. However, in the case of companies that are incurring losses or are in an early cycle of development, generating meager or no profits, price-to-sales (P/S) is a good valuation metric to identify cheap stocks.

Other than P/E and P/S, the price-to-book ratio (P/B ratio) is also an easy-to-use tool for zeroing in on low-priced stocks that have high-growth prospects.

The P/B ratio is used to calculate how much an investor needs to pay for each dollar of the book value of a stock. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share.

The P/B ratio helps identify low-priced stocks with high growth prospects. Centene Corporation CNC, Pediatrix Medical Group MD, Pfizer PFE, StoneCo STNE and Banco Santander SAN are some such stocks.

Now, let us understand the concept of book value.

What is Book Value?

There are several ways by 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 goes 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 the 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. However, like P/E or P/S ratio, it is always better to compare P/B ratios 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 13 stocks that qualified the screening: 

St. Louis, MS-based, Centene is a well-diversified healthcare company that primarily provides a set of services to government-sponsored healthcare programs. The company serves the under-insured 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.

CNC has a projected 3-5-year EPS growth rate of 11.5%.

Centene currently has a Zacks Rank #2 and a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

Sunrise, FL-based Pediatrix Medical Group provides newborn, maternal-fetal, radiology, pediatric cardiology and other pediatric subspecialties physician services in the United States and Puerto Rico. It also offers neonatal care services such as clinical care to babies born prematurely or with complications within specific units at hospitals through neonatal physician subspecialists, neonatal nurse practitioners and other pediatric clinicians.

Pediatrix Medical presently has a Zacks Rank #2 and a Value Score of A. The company has a projected 3-5-year EPS growth rate of 9.5%.

New York-based Pfizer is one of the largest drugmakers in the world, marketing a wide range of drugs and vaccines. Pfizer currently has a Zacks Rank #2 and a Value Score of A. PFE has a projected 3-5-year EPS growth rate of 13.8%.

StoneCo provides financial technology solutions. The company offers an end-to-end cloud-based technology platform to conduct electronic commerce across in-store, online and mobile channels. StoneCo is based in Sao Paulo, Brazil.

STNE has a Zacks Rank #1 and a Value Score of B. STNE has a projected 3-5-year EPS growth rate of 26.3%.

Banco Santander is the biggest bank in Spain and the biggest international bank in Latin America as well. Banco Santander is based in Boadilla del Monte, Spain. It currently has a Zacks Rank of #2. 

SAN has a Value Score of A and a projected 3-5-year EPS growth rate of 9.6%.

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