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SLM vs. DFS: Which Stock Should Value Investors Buy Now?

Zacks Equity Research

Investors interested in Financial - Consumer Loans stocks are likely familiar with Sallie Mae (SLM) and Discover (DFS). But which of these two stocks is more attractive to value investors? We'll need to take a closer look to find out.

The best way to find great value stocks is to pair a strong Zacks Rank with an impressive grade in the Value category of our Style Scores system. The Zacks Rank is a proven strategy that targets companies with positive earnings estimate revision trends, while our Style Scores work to grade companies based on specific traits.

Currently, Sallie Mae has a Zacks Rank of #1 (Strong Buy), while Discover has a Zacks Rank of #5 (Strong Sell). The Zacks Rank favors stocks that have recently seen positive revisions to their earnings estimates, so investors should rest assured that SLM has an improving earnings outlook. But this is only part of the picture for value investors.

Value investors are also interested in a number of tried-and-true valuation metrics that help show when a company is undervalued at its current share price levels.

Our Value category highlights undervalued companies by looking at a variety of key metrics, including the popular P/E ratio, as well as the P/S ratio, earnings yield, cash flow per share, and a variety of other fundamentals that have been used by value investors for years.

SLM currently has a forward P/E ratio of 4.98, while DFS has a forward P/E of 6.19. We also note that SLM has a PEG ratio of 0.45. This popular figure is similar to the widely-used P/E ratio, but the PEG ratio also considers a company's expected EPS growth rate. DFS currently has a PEG ratio of 1.02.

Another notable valuation metric for SLM is its P/B ratio of 1.36. The P/B ratio is used to compare a stock's market value with its book value, which is defined as total assets minus total liabilities. For comparison, DFS has a P/B of 1.52.

These are just a few of the metrics contributing to SLM's Value grade of B and DFS's Value grade of C.

SLM is currently sporting an improving earnings outlook, which makes it stick out in our Zacks Rank model. And, based on the above valuation metrics, we feel that SLM is likely the superior value option right now.


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