Tap These 5 Profitable Stocks With Alluring EV / EBITDA Ratios – November 10, 2021
Price / Earnings (P / E) multiple is popular among investors looking for cheap stocks. Besides being a widely used tool for filtering stocks, P / E is also a popular measure for determining the fair market value of a business. However, even this ubiquitous valuation multiple has some drawbacks.
EV-to-EBITDA is a better option, here’s why
While P / E is the most popular valuation metric, a more complicated multiple called EV-to-EBITDA works even better. Often seen as a better alternative to P / E, it gives a true picture of a company’s valuation and earning potential, and has a more comprehensive approach to valuation. While the P / E takes into account a company’s share of equity, the EV / EBITDA ratio determines its total value.
EV-to-EBITDA is the enterprise value (EV) of a stock divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA). EV is the sum of a company’s market capitalization, debt, and preferred shares less cash and cash equivalents. In essence, that’s the whole value of a business.
EBITDA, the other component of the ratio, gives a clearer picture of a company’s profitability because it eliminates non-cash expenses like depreciation and amortization that reduce the bottom line. It is also often used as an indicator of cash flow.
Just like the P / E, the lower the EV / EBITDA ratio, the more attractive it is. A low EV / EBITDA ratio could indicate that a stock is potentially undervalued.
EV / EBITDA takes into account a company’s balance sheet debt that the P / E ratio does not take into account. For this reason, the EV / EBITDA ratio is typically used to assess potential acquisition targets, as it indicates the amount of debt that the acquirer has to assume. Equities with a low EV / EBITDA multiple could be seen as attractive candidates for a takeover.
Another downside of the P / E is that it cannot be used to value a loss making business. A company’s profits are also subject to accounting estimates and management manipulation. On the other hand, the EV-to-EBITDA is difficult to manipulate and can also be used to value companies in loss but with positive EBITDA.
The EV / EBITDA ratio is also a useful yardstick for measuring the value of heavily indebted and heavily impaired companies. Additionally, it can be used to compare companies with different levels of debt.
However, the EV / EBITDA ratio is not without limitations and cannot on its own conclusively determine the inherent potential and future performance of a stock. The multiple varies across industries and is generally not appropriate when comparing stocks in different industries given their varying capital expenditure requirements.
As such, a strategy based solely on the EV / EBITDA ratio might not yield the desired results. But you can combine it with other major ratios in your stock investing toolkit such as price / book (P / B), price / earnings, and price / sell (P / S) to filter the good deals.
Here are the parameters to filter for good deals:
12 month EV / EBITDA – most recent below industry X median: A lower EV / EBITDA ratio represents a cheaper valuation.
P / E using (F1) less than the X-Industry median: This metric filters stocks that are trading at a discount relative to their peers.
P / B lower than the X-Industry median: A P / B lower than the industry average implies that the stock is undervalued.
P / S lower than the X-Industry median: The lower the P / S ratio, the more attractive the stock, as investors will have to pay a lower 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 the industry median X: This parameter will help select stocks that have growth rates above the industry median. This is a significant indicator because decent earnings growth always adds to investor optimism.
Average volume over 20 days greater than or equal to 100,000: Adding this metric ensures that stocks can be traded easily.
Current price greater than or equal to $ 5: This setting will help filter stocks that are trading at a minimum price of $ 5 or more.
Rank of Zacks less than or equal to 2: No screening is complete without the Zacks Rank, which has proven itself since its inception. It is a basic truth that stocks with a Zacks # 1 (strong buy) or 2 (buy) ranking have always been successful in beating adversity and outperforming the market.
Score value less than or equal to B: Our research shows that stocks with a value score of A or B when combined with a rank 1 or 2 of Zacks offer the best upside potential.
Here are five of the 25 actions that passed the screen:
TravelCenters of America Inc. (AT – Free Report) is the largest publicly traded full-service travel center network in the United States. This Zacks Rank # 1 share forecast year-over-year profit growth of 362.6% for the current year and a value score of A.
Sports and Outdoor Academy, Inc. (ASO – Free Report) is one of the largest sporting and outdoor goods stores in the United States. This Zacks Rank # 2 company has an expected year-over-year profit growth rate of 66.1% for the current fiscal year and a value score of A. You can see The full list of today’s Zacks # 1 Rank stocks here.
ASE Technology Holding Co., Ltd. (ASX – Free Report) is a semiconductor assembly and test manufacturing service provider. This Zacks Rank # 2 company has an expected year-over-year profit growth rate of 76.7% for the current year and a value score of A.
Universal Insurance Holdings, Inc. (Uve – Free Report) offers property and casualty insurance and value-added insurance. This Zacks Rank # 2 company has an expected year-over-year profit growth rate of 370% for the current year and a value score of A.
Covenant Logistics Group, Inc. (CVLG – Free Report), together with its subsidiaries, offers a portfolio of transport and logistics services. This Zacks Rank # 2 stock has an expected year-over-year profit growth rate of 229.6% for the current year and a value score of A.
You can get the rest of the stocks on this list by signing up now for your 2 week free trial of the Research Assistant and start using this screen in your own trading. Plus, you can also create your own strategies and test them out before you get into investing.
The Research Assistant is a great place to start. It’s easy to use. Everything is in plain language. And it’s very intuitive. Start your research assistant trial today. And the next time you read an economic report, open the research assistant, plug in your findings, and see what gems come out of it.
Disclosure: Officers, directors and / or employees of Zacks Investment Research may own or have sold securities short and / or hold long and / or short positions in options mentioned in this document. An affiliated investment advisory firm may own or have sold securities short and / or hold long and / or short positions in options mentioned in this document.
Disclosure: Information on the performance of Zacks’ portfolios and strategies can be found at: https://www.zacks.com/performance.