Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?
One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Tenet Healthcare Corporation THC stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:
A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.
On this front, Tenet Healthcare has a trailing twelve months PE ratio of 16.0, as you can see in the chart below:
This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 stands at about 17.7. If we focus on the long-term PE trend, Tenet Healthcare’s current PE level puts it below its midpoint (17.2) over the past five years. Moreover, the current level is fairly below the highs for this stock, suggesting that it might be a good entry point.
Further, the stock’s PE also compares favorably with the sector’s trailing twelve months PE ratio, which stands at 20.1. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Tenet Healthcare has a forward PE ratio (price relative to this year’s earnings) of just 13.5, so it is fair to say that a slightly more value-oriented path may be ahead for Tenet Healthcare stock in the near term too.
Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.
Right now, Tenet Healthcare has a P/S ratio of about 0.2. This is significantly lower than the S&P 500 average, which comes in at 3.2 right now. Also, this is below the highs for this stock (0.4) in particular over the past few years.
If anything, the stock is trading at its median value for the time period from a P/S metric. This does not provide us with a conclusive direction as to the relative valuation of the stock in comparison to its historical trend.
Broad Value Outlook
In aggregate, Tenet Healthcare currently has a Zacks Value Style Score of A, putting it into the top 20% of all stocks we cover from this look. This makes Tenet Healthcare a solid choice for value investors, and some of its other key metrics make this pretty clear too.
For example, the PEG ratio for Tenet Healthcare is 0.6, a level that is lower than the industry average of 1.1. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Additionally, its P/CF ratio (another great indicator of value) comes in at 2.9, which is far better than the industry average of 6.7. Clearly, THC is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though Tenet Healthcare might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of B and a Momentum score of D. This gives THC a Zacks VGM score—or its overarching fundamental grade—of A. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s recent earnings estimates have been mixed at best. The current quarter has seen three estimates go higher in the past sixty days compared to four lower, while the full year estimate has seen nine upward and one downward revision in the same time period.
As a result, the current quarter consensus estimate has fallen by 19.4% in the past two months, while the full year estimate has increased 20.3%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Tenet Healthcare Corporation Price and Consensus
Tenet Healthcare Corporation Price and Consensus | Tenet Healthcare Corporation Quote
Despite this somewhat mixed trend, the stock has a Zacks Rank #2 (Buy) on the back of its strong value metrics and this is why we are expecting outperformance from the company in the near-term.
Tenet Healthcare is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. With a formidable industry rank (among the Top 40%) and strong Zacks Rank, Tenet Healthcare looks like a strong value contender. In fact, over the past two years, the industry has clearly outperformed the broader market, as you can see below:
So, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.
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