A value investor spends time unearthing companies with strong financials and an undervalued share price. The following four ratios help identify equities that could be attractive to the value investor:
- Price-to-book ratio (P/B) is a great way to find a low valued stock that the market has disregarded. It is calculated by dividing the total market capitalization by the difference in the total book value of assets and total book value of liabilities. A low P/B can indicate there is value that has not been realized in a stock while it can also be a warning sign that the company is having issues.
- Long-term debt-to-equity (LTD/EQ) ratio is used to determine a company's leverage. A company that has a higher ratio would be considered more risky. The ratio is calculated by dividing total long-term debt by the total preferred stock and common stock.
- Price to earnings ratio (P/E) is another calculation that can be used to identify stocks, however, this ratio is not one of my favorites because chief financial officers can play tricks with the earnings number. Be cognizant of the cash flow of the company by looking at liquidity ratios.
- Price-to-free cash flow (P/FCF) is used to judge if a stock is overvalued or undervalued. The lower the P/FCF ratio is the cheaper the stock on a cash flow basis. The ratio is calculate by dividing the share price by the free-cash flow per share.
AECOM Technology Corporation and Everest Re Group, Ltd. are two stocks that could be an attractive value play. Both stocks have a P/B under 1, an LTD/EQ under .4, a P/E under 10, and a P/FCF under 15.
1.) AECOM Technology Corporation (ACM)
AECOM Technology Corporation provides professional technical and management support services for commercial and government clients worldwide. Its Professional Technical Services segment offers planning, consulting, architectural and engineering design, and program and construction management services for a range of projects. AECOM Technology Corporation was founded in 1980 and is headquartered in Los Angeles, California.
|Price-to-Free Cash Flow||6.20|
|EPS Next 5 Years||16%|
AECOM has positive metrics. Cash flow is healthy while institutional ownership is above 60% and the short float is below 1.46%. They recently landed the final design contract for Denver's North Metro Rail Line expansion while in Europe they won a contract to provide technical assistance to Romania's water agency for three projects. AECOM has earned an average rating of "Buy" from the nine analyst that follow the company. The average five year earnings growth estimate is 16% which is slightly higher then the industry average.
2.) Everest Re Group, Ltd. (RE)
Everest Re Group, Ltd., together with its subsidiaries, underwrites reinsurance and insurance in the United States (U.S.), Bermuda, and international markets. It operates in four segments: U.S. Reinsurance, Insurance, International, and Bermuda. The company was founded in 1973 and is headquartered in Hamilton, Bermuda.
|Price-to-Free Cash Flow||10.73|
|EPS Next 5 Years||11.67%|
Everest Re Group, Ltd. also has healthy metrics. Institutional ownership is well above 90% while the short float is 2.08%. Diamondback Capital has been actively taking a position in the stock. They recently reported ownership of slightly more then 711,000 shares. Thirteen analysts currently follow Everest Re and they feel that the stock will outperform the industry by growing 12.5% per annum during the next five years while the industry is expected to grow 10.64%.
Financial data and company descriptions sourced from finviz.com and Yahoo Finance.