5 Low Price-to-Book Stocks to Add to Your Portfolio

Price-to-book ratio or P/B ratio is essentially the ratio of stock price to book value, i.e. how much an investor needs to pay for each dollar of book value of a stock. It is calculated by dividing the current closing price of the stock by the latest quarter’s book value per share.

In value investing, it is a common practice to pick stocks that are cheap but fundamentally strong. There are a number of investment styles for finding great stocks at attractive values.

While considering valuation metrics, though price-to-earnings and price-to-sales are the first choices, the P/B ratio is also emerging as a convenient tool for identifying low-priced stocks that have high-growth prospects.

Here’s the formula for P/B ratio:

P/B ratio = market capitalization/book value of equity.

The P/B ratio helps to identify low-priced stocks that have high growth prospects. Magna International MGA, General Motors Company GM, Unum Group UNM, StoneCo Ltd. STNE and Affiliated Managers Group AMG are some such stocks.

Now let us understand the concept of book value.

Understanding Book Value?

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 the common stockholders’ equity on the balance sheet. However, depending on the company’s balance sheet, intangible assets should also be subtracted from the 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 of 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.

Screening Parameters

Price to Book (common Equity) less than X-Industry Median: A lower P/B compared with the industry average implies that there is enough room for the stock to gain.

Price to Sales less than X-Industry Median: The P/S ratio determines how much the market values every dollar of the company’s sales/revenues — a lower ratio than the industry makes the stock attractive.

Price to Earnings using F(1) estimate less than X-Industry Median: The P/E ratio (F1) values a company based on its current share price relative to its estimated earnings per share — a lower ratio than the industry is considered better.

PEG less than 1: PEG links the P/E ratio to the future growth rate of the company. The PEG ratio portrays a more complete picture than the P/E ratio. A value of less than 1 indicates that the stock is undervalued and investors need to pay less for a stock that has bright earnings growth prospects.

Current Price greater than or equal to $5: They must all be trading at a minimum of $5 or higher.

Average 20-Day Volume greater than or equal to 100,000: A substantial trading volume ensures that the stock is easily tradable.

Zacks Rank less than or equal to #2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform irrespective of the market environment.

Value Score equal to A or B: Our research shows that stocks with a Value Score of A or B when combined with a Zacks Rank #1 or 2, offer the best opportunities in the value investing space.

Here are our five picks out of the nine stocks that qualified the screening:

Based in Aurora, Canada, Magna International is a manufacturer and supplier of complete automotive components. The company designs, develops and manufactures automotive systems, assemblies, modules and components, apart from engineering and assembling complete vehicles, primarily for sale to original equipment manufacturers of cars and light trucks.

Magna International has a Zacks Rank #2 and a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

Magna International has a projected 3–5 year EPS growth rate of 20.43%.

General Motors Company is one of the world’s largest automakers. From going bankrupt in 2009 to becoming one of the world’s best-run car companies, General Motors has come a long way. General Motors held the largest share of the U.S. auto market at 16% in 2022

General Motors Company has a Zacks Rank #2 and a Value Score of A. The company has a projected 3-5-year EPS growth rate of 9.85%.

Headquartered in Chattanooga, TN, Unum Group was created following the June 1999 merger of Provident Companies, Inc. and Unum Corporation. Along with disability insurance, the company provides long-term care insurance, life insurance, employer- and employee-paid group benefits and related services.

Unum Group has a projected 3–5-year EPS growth rate of 8.39%. UNM currently has a Zacks Rank #2 and a Value Score of A.

StoneCo provides financial technology solutions. The company offers an end-to-end cloud-based technology platform to conduct electronic commerce across in-store, online and mobile channels. StoneCo is based in Sao Paulo, Brazil.

STNE has a Zacks Rank #1 and a Value Score of B. STNE has a projected 3–5 year EPS growth rate of 55.15%.

Affiliated Managers Group is a global asset manager with equity investments in a large group of investment management firms or affiliates. On the whole, the affiliates manage more than 500 investment products across each major product category – global, international and emerging markets equities, domestic equities, alternative and fixed income products.

Affiliated Managers Group has a projected 3-5-year EPS growth rate of 10.97%. AMG currently has a Zacks Rank #2 and a Value Score of A.

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