For Immediate Release
Chicago, IL – November 11, 2020 – Stocks in this week’s article are Canadian Solar Inc. CSIQ, Laboratory Corporation of America Holdings LH, Boise Cascade Company BCC, Atlas Corp. ATCO and Pampa Energía S.A. PAM.
Low Price-to-Book Stocks to Tap Market Boom
Given the recent upside in stocks, value analysis is increasingly gaining prominence in identifying stocks at great values. Price to earnings (P/E) and price to sales (P/S) are the first ratios to hit an investor’s mind while looking for undervalued stocks. However, the underrated price-to-book ratio (P/B ratio) is also an easy-to-use valuation tool for identifying low-priced stocks with exceptional returns.
The P/B ratio is calculated as below:
P/B ratio = market capitalization/book value of equity
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 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 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 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 isn't 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.
For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/1099506/6-low-pricetobook-value-stocks-to-tap-market-boom
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Canadian Solar Inc. (CSIQ) : Free Stock Analysis Report
Pampa Energia S.A. (PAM) : Free Stock Analysis Report
Laboratory Corporation of America Holdings (LH) : Free Stock Analysis Report
Boise Cascade, L.L.C. (BCC) : Free Stock Analysis Report
Seaspan Corporation (ATCO) : Free Stock Analysis Report
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