For Immediate Release
Chicago, IL – February 28, 2017 - Stocks in this week’s article include LG Display Co., Ltd. (NYSE: LPL – Free Report ), Fiat Chrysler Automobiles N.V. (NYSE: FCAU – Free Report ), American Equity Investment Life Holding Company (NYSE: AEL – Free Report ), ArcelorMittal (NYSE: MT – Free Report ) and Aspen Insurance Holdings Limited (NYSE: AHL – Free Report ).
Screen of the Week of Zacks Investment Research:
Tap 5 Value Stocks with Enticing EV/EBITDA Ratios
Value investors tend to cling to the price-to-earnings (P/E) ratio while looking for stocks that are trading at attractive prices. A widely accepted approach is to chase stocks that flaunt a low P/E ratio. But even this ubiquitously used equity valuation multiple suffers a few drawbacks.
What Makes EV/EBITDA a Better Option?
The popularity of P/E can be attributed to its apparent simplicity. While it is the most commonly used tool for assessing a firm’s value, a more complicated metric called EV/EBITDA does a better job. Also referred to as enterprise multiple, EV/EBITDA offers a clearer picture of a company’s valuation and its earnings potential. While P/E just considers a firm’s equity portion, EV/EBITDA determines its total value.
EV/EBITDA is the enterprise value (EV) of a stock divided by its earnings before interest, taxes, depreciation and amortization (EBITDA). EV is a firm’s market capitalization plus the market value of its debt and preferred equity minus cash. Simply put, it is the total value of a firm.
EBITDA, the other component of the ratio, is a true reflection of a company’s profitability as it removes the impact of non-cash expenses like depreciation and amortization that depress net earnings. It is also often used as a proxy for cash flows.
Just like P/E, the lower the EV/EBITDA ratio, the more attractive it is. A low EV/EBITDA ratio could imply that a stock is undervalued.
However, unlike P/E ratio, EV/EBITDA takes debt on a company’s balance sheet into account. Given this reason, EV/EBITDA is generally used to value potential acquisition targets as it shows the amount of debt the acquirer has to assume. Stocks with a low EV/EBITDA multiple could be seen as attractive takeover candidates.
Moreover, P/E can’t be used to value a loss-making firm. A company’s earnings are also subject to accounting estimates and management manipulation. In contrast, EV/EBITDA is difficult to manipulate and can also be used to value companies that are making loss but are EBITDA-positive.
EV/EBITDA also allows the comparison of companies with different debt levels and is a useful tool in measuring the value of firms that are highly leveraged and have substantial depreciation and amortization expenses.
But EV/EBITDA is not devoid of limitations and it alone can’t conclusively determine a stock’s inherent potential and its future performance. It varies across industries and is generally not appropriate while comparing stocks in different industries given their diverse capital spending requirements.
Thus, a strategy entirely based on EV/EBITDA might not yield the desired results. But you can combine it with other key ratios such as price-to-book (P/B), P/E and price-to-sales (P/S) to screen true value stocks.
Here are the parameters to screen for value stocks:
EV/EBITDA 12 Months-Most Recent less than X-Industry Median: A lower EV/EBITDA ratio represents a cheaper valuation.
P/E using (F1) less than X-Industry Median: This metric screens stocks that are trading at a discount to their peers.
P/B less than X-Industry Median: A lower P/B compared with the industry average implies that the stock is undervalued.
P/S less than X-Industry Median: The lower the P/S ratio the more attractive the stock is as investors will have to pay a smaller price for the same amount of sales generated by the company.
Estimated One-Year EPS Growth F(1)/F(0) greater than or equal to X-Industry Median: This parameter will help in screening stocks that have growth rates higher than the industry median. This is a meaningful indicator as decent earnings growth always adds to investor optimism.
Average 20-day Volume greater than or equal to 100,000: The addition of this metric ensures that shares can be traded easily.
Current Price greater than or equal to $5: This parameter will help in screening stocks that are trading at a minimum price of $5 or higher.
Zacks Rank less than or equal to 2: No screening is complete without the Zacks Rank, which has proven its worth since inception. It is a fundamental truth that stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have always managed to beat adversities and outperform the market.
Value Score of less than or equal to B: Our research shows that stocks with a Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or 2 offer the best upside potential.
Here are five of the 13 stocks that passed the screen:
LG Display Co., Ltd. (NYSE: LPL – Free Report ) primarily manufactures and sells thin film transistor liquid crystal display (TFT-LCD) panels. This Zacks Rank #1 stock has an expected year-over-year earnings growth rate of 62.9% for 2017.
Fiat Chrysler Automobiles N.V. (NYSE: FCAU – Free Report ) operates as an international automotive company and is engaged in designing, engineering, manufacturing, distributing and selling vehicles, components and production systems. This Zacks Rank #1 stock delivered an average positive earnings surprise of around 39.7% over the trailing four quarters. You can see the complete list of today’s Zacks #1 Rank stocks here .
American Equity Investment Life Holding Company (NYSE: AEL – Free Report ) is a full-service underwriter of a broad line of annuity and insurance products, with primary emphasis on the sale of fixed rate and index annuities. This Zacks Rank #2 stock has an expected year-over-year earnings growth rate of 66.4% for 2017.
ArcelorMittal (NYSE: MT – Free Report ) is the world's leading steel company, operating a balanced portfolio of cost competitive steel plants across both the developed and developing world. This Zacks Rank #2 stock delivered an average positive earnings surprise of around 143.8% over the trailing four quarters.
Aspen Insurance Holdings Limited (NYSE: AHL – Free Report ) is a Bermudian holding company that provides property and casualty reinsurance in the global market, property and liability insurance principally in the UK and surplus lines insurance in the U.S. This Zacks Rank #2 stock has an expected year-over-year earnings growth rate of 97.4% for 2017.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
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.
Click here to sign up for a free trial to the Research Wizard today .
About Screen of the Week
Zacks.com created the first and best screening system on the web earning the distinction as the "#1 site for screening stocks" by Money Magazine. But powerful screening tools is just the start. That is why Zacks created the Screen of the Week to highlight profitable stock picking strategies that investors can actively use. Each week, Zacks Profit from the Pros free email newsletter shares a new screening strategy. Learn more about it here https://at.zacks.com/?id=112
Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978. The later formation of the Zacks Rank, a proprietary stock picking system; continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Click here for your free subscription to Profit from the Pros .
Get the full Report on LPL - FREE
Get the full Report on FCAU - FREE
Get the full Report on AEL - FREE
Get the full Report on MT - FREE
Get the full Report on AHL - FREE
Follow us on Twitter: https://twitter.com/zacksresearch
Join us on Facebook: https://www.facebook.com/ZacksInvestmentResearch
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Contact: Jim Giaquinto
Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer .
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
LG Display Co., Ltd. (LPL): Free Stock Analysis Report
Fiat Chrysler Automobiles N.V. (FCAU): Free Stock Analysis Report
American Equity Investment Life Holding Company (AEL): Free Stock Analysis Report
ArcelorMittal (MT): Free Stock Analysis Report
Aspen Insurance Holdings Limited (AHL): Free Stock Analysis Report
To read this article on Zacks.com click here.