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# 5 Price-to-Book Value Picks to Improve Portfolio Returns

While there are a host of valuation metrics at oneâ€™s disposal, the first to cross oneâ€™s mind is the price-to-earnings ratio. However, in case of loss-making companies, the price-to-earnings ratio is negative. In such a scenario, price-to-sales could indicate the hidden strength of the business.

The price-to-book ratio (P/B ratio) is also an easy-to-use tool for identifying 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 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.

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 companyâ€™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 its liabilities.

It is calculated by subtracting total liabilities from the total assets of a company. In most cases, this equates to the common stockholdersâ€™ equity on the balance sheet. However, depending on the companyâ€™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 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 caveat. A P/B ratio 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 which case the stock should be shunned because it may be destroying shareholder value. Conversely, the stockâ€™s price may be significantly high â€” thereby pushing the P/B ratio to more than one â€” in the likely case that it has become a takeover target, a good enough reason to own the stock.

Moreover, the P/B ratio isn't without limitations. It is useful for businesses â€” like finance, investments, insurance and banking or manufacturing companies â€” 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 companyâ€™s sales/revenues â€” 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 â€” a lower ratio than the industry is considered better.

PEG less than 1: PEG ratio links the P/E ratio to the future growth rate of the company. 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.

Here are five stocks that qualified the screening:

DaVita DVA, a leading provider of dialysis services in the United States, currently has a Zacks Rank #1 and a Value Score of A. It has a 3-5 year EPS growth rate of 21.96%. You can see the complete list of todayâ€™s Zacks #1 Rank stocks here.

MiX Telematics Limited MIXT provides fleet and mobile asset management solutions. The company has a Zacks Rank #2 and a Value Score of B. It has a 3-5 year EPS growth rate of 25%.

Rush Enterprises, Inc. RUSHA, an integrated retailer of commercial vehicles and related services in the United States, has a projected 3-5 year EPS growth rate of 15%. It currently has a Zacks Rank #2 and a Value Score of A.

Canadian Solar CSIQ is a vertically integrated manufacturer of silicon ingots, wafers, cells, solar modules (panels) and custom-designed solar power applications. The stock currently has a Zacks Rank #1. It has a 3-5 year EPS growth rate of 32% and a Value Score of A.

SYNNEX SNX, a business process services company, currently has a Zacks Rank #2. It has a 3-5 year EPS growth rate of 12% and a Value Score of A.

The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacksâ€™ portfolios and strategies are available at: https://www.zacks.com/performance

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Rush Enterprises, Inc. (RUSHA) : Free Stock Analysis Report

MiX Telematics Limited (MIXT) : Free Stock Analysis Report

SYNNEX Corporation (SNX) : Free Stock Analysis Report

DaVita Inc. (DVA) : Free Stock Analysis Report

Canadian Solar Inc. (CSIQ) : Free Stock Analysis Report