Back to basics of value investing: the P/E ratio

  • (1:00) – Finding Strong Stocks Using Core Value Indicators
  • (10:30 – Stock Analysis Criteria: Tracey’s Top Stock Picks
  • (24:30) – Episode overview: KBH, MHO, BP, ABG, HZO, WGO
  • [email protected]

Welcome to episode #267 of the Value Investor podcast.

Each week, Tracey Ryniec, the editor of Zacks Value Investor Portfolioshares some of his best investment advice and stock picks.

With so many new listeners to the Value Investor podcast, Tracey decided to get back to basics.

A value stock is not a value because it trades at $5. It is valuable because investors get its income cheaply.

What is the P/E ratio?

The P/E ratio is often used by value investors as a basic screen. It is the share price divided by earnings.

The cheaper, the better. Most value investors are looking for a P/E of 15 or less.

An AP/E of 10 or less generally indicates that a company is very cheap.

Screening for the P/E ratio

Running a screen for the P/E ratio below 15 on still gives you 793 shares. This is too long a list to be useful.

Adding the Zacks ranking of #1 (Strong Buy) or #2 (Buy) will get you companies with rising earnings estimates.

But it still gives a list of 199 actions. It’s still a lot.

Lowering the P/E ratio all the way down to 7, which is very cheap, and including the Zacks rank of #1 (Strong Buy), which is the best Zacks rank, you get 44 shares.

5 Very Cheap Stocks with a High Zacks Rank

1. BP BP

BP is a major oil company. Earnings are expected to rise 22% in 2022 to $4.61 from $3.77 last year, with gross hitting $90.

Remember that oil companies had a tough time in 2020 as earnings turned negative.

BP is cheap, with a forward P/E of 6.9, even though the stock is up 20% year-to-date.

Energy was the best performing sector in 2021.

Is BP too hot to handle after the 2021 rally?

2. Asbury ABG Automotive Group

Asbury Automotive Group is an automobile retailer. With demand for new and used autos skyrocketing during the pandemic, profits have soared.

Asbury’s revenue in 2022 is expected to rise another 16.6% to $29.83 from $25.58 in 2021.

These stocks have been flat in 2022, as they have fallen around 1% year-to-date after a big rally in 2021.

Yet Asbury Automotive is still very cheap with a forward P/E of just 5.6.

Does Asbury Automotive Group have more leeway?

3. MarineMax, Inc. HZO

MarineMax is the largest pleasure boat and yacht retailer in the world. It has 79 outlets.

Consumers continue to take to the water as MarineMax recently reported record fiscal first quarter results with revenue up 15% to $472 million. Gross margins also rose to a record 35% in the quarter, despite industry-wide supply chain challenges.

Analysts are optimistic, with 4 increases in estimates for fiscal year 2022 last week. Earnings are expected to rise 16.2% year over year.

Still, shares of MarineMax have fallen almost 20% since the start of the year.

And now it’s very cheap, with a forward P/E of just 6.

Why is the street selling MarineMax shares?

4. Winnebago WGO

Winnebago, the RV and boat maker, recently showcased an all-electric RV at the Florida Super Show.

5 estimates have been revised up on Winnebago in the past 2 months, pushing FY2022 earnings consensus to $12.30 from $9.40 in this period.

That’s 43% profit growth, as Winnebago only earned $8.55 the previous year.

Winnebago is seen as a pandemic winner because people wanted to be outdoors and wanted to hit the road. RV sales have exploded.

But the street is getting nervous that this demand may fade.

Winnebago shares are down 10% year-to-date and are now very cheap, with a forward P/E of 5.5.

Is Winnebago a value trap or is it overlooked?

5. Macy’s M

Macy’s was one of the hottest retail stocks last year as consumers started buying clothes again.

An estimate was revised up for the next fiscal year last month, but profits for fiscal 2023 are expected to fall 16% next year.

Shares have fallen 11% in the past 3 months.

Macy’s has been cheap since the coronavirus hit and is now trading at 6.4x.

Are analysts too bearish on Macy’s outlook for fiscal 2023?

What else do you need to know about the P/E ratio and the basics of value investing?

Tune into this week’s podcast to find out.

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In addition to the investment ideas discussed above, would you like to know our top 10 picks for all of 2022?

From its creation in 2012 to 2021, the Zacks Top 10 Stocks portfolios gained an impressive +1,001.2% vs. +348.7% for the S&P 500. Now our research director has combed through 4,000 companies covered by the Zacks Ranking and selected the top 10 tickers to buy and keep. Don’t miss your chance to enter…because the sooner you do, the more chances you have of winning.

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Click to get this free report

BP plc (BP): Free Stock Analysis Report

Macy’s, Inc. (M): Free Stock Analysis Report

Asbury Automotive Group, Inc. (ABG): Free Inventory Analysis Report

MarineMax, Inc. (HZO): Free Stock Analysis Report

Winnebago Industries, Inc. (WGO): Free Stock Analysis Report

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Sallie R. Loera