Tap 5 Bargain Stocks With Amazingly Low EV-to-EBITDA Ratios

Investors generally have a fixation on the price-to-earnings (P/E) multiple while seeking stocks that are trading at a bargain. A widely favored approach by value investors is to chase stocks that have a low P/E ratio. But even this widely popular valuation metric is not without its pitfalls.

While P/E is hands down the most widely used equity valuation ratio in the market, a relatively less-used metric called EV-to-EBITDA is often viewed as a better option as it offers a clearer picture of a company’s valuation and earnings potential. Unlike P/E. which solely considers a company’s equity portion, EV-to-EBITDA determines its total value.

Oasis Petroleum Inc. OAS, ArcBest Corporation ARCB, United Microelectronics Corporation UMC, SpartanNash Company SPTN and AXIS Capital Holdings Limited AXS are some stocks with impressive EV-to-EBITDA ratios.

What Makes EV-to-EBITDA a Better Alternative?

Also referred to as the enterprise multiple, 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, its debt and preferred stock minus cash and cash equivalents.

EBITDA, the other element, gives a better idea of a company’s profitability as it removes the impact of non-cash expenses like depreciation and amortization that reduce net earnings. It is also often used as a proxy for cash flows.

Usually, the lower the EV-to-EBITDA ratio, the more attractive it is. A low EV-to-EBITDA ratio could signal that a stock is potentially undervalued.

However, unlike the P/E ratio, EV-to-EBITDA takes into account the debt on a company’s balance sheet. Given this reason, EV-to-EBITDA is usually used to value the possible acquisition targets. Stocks with a low EV-to-EBITDA multiple could be seen as potential takeover candidates.

Another key downside of P/E is that it can’t be used to value a loss-making entity. Moreover, a company’s earnings are also subject to accounting estimates and management manipulation. On the other hand, EV-to-EBITDA is difficult to manipulate and can also be used to value companies incurring losses but are EBITDA-positive.

EV-to-EBITDA is also a useful yardstick in evaluating the value of firms that are highly leveraged and have a high degree of depreciation. Moreover, it can be used to compare companies with different levels of debt.

However, EV-to-EBITDA is not devoid of shortcomings and alone can’t conclusively determine a stock’s inherent potential and future performance. The multiple varies across industries and is usually not appropriate while comparing stocks in different industries, given their diverse capital expenditure requirements.

As such, a strategy solely based on EV-to-EBITDA might not yield the desired results. But you can club it with the other major ratios in your stock-investing toolbox such as price-to-book (P/B), P/E and price-to-sales (P/S) to screen bargain stocks.

Screening Criteria

Here are the parameters to screen for bargain stocks:

EV-to-EBITDA 12 Months-Most Recent less than X-Industry Median: A lower EV-to-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 Value Score of A or B when combined with a Zacks Rank #1 or 2 offer the best upside potential.

Here are our five picks out of the 19 stocks that passed the screen:

Oasis Petroleum is an independent explorer engaged in the acquisition and development of oil and natural gas resources. This Zacks Rank #1 stock has a Value Score of A.

Oasis Petroleum has an expected earnings growth rate of 270.3% for the current year. The Zacks Consensus Estimate for OAS's current-year earnings has been revised 17.2% upward over the past 60 days.

ArcBest provides freight transportation services and solutions. This Zacks Rank #1 stock has a Value Score of B. You can see the complete list of today’s Zacks #1 Rank stocks here.

ArcBest has an expected earnings growth rate of 50.7% for the current year. The Zacks Consensus Estimate for ARCB's current-year earnings has been revised 20.9% upward over the last 60 days.

United Microelectronics is a leading semiconductor foundry company, providing high-quality integrated circuit production with a focus on logic and specialty technologies to cater every major sector of the electronics industry. This Zacks Rank #2 stock has a Value Score of A.

United Microelectronics has an expected earnings growth rate of 51.8% for the current year. The Zacks Consensus Estimate for UMC’s current-year earnings has been revised 16.7% upward over the past 60 days.

SpartanNash distributes grocery products to a diverse group of independent and chain retailers, its corporate-owned retail stores, and U.S. military commissaries and exchanges. This Zacks Rank #2 stock has a Value Score of A.

SpartanNash has an expected earnings growth rate of 23.5% for the current year. The Zacks Consensus Estimate for SPTN's current fiscal-year earnings has been revised 6.6% upward over the past 60 days.

AXIS Capital Holdings provides a broad range of specialty insurance and reinsurance solutions to its clients globally. This Zacks Rank #2 stock has a Value Score of A.

AXIS Capital Holdings has an expected earnings growth rate of 20.7% for the current year. The Zacks Consensus Estimate for AXS’s current-year earnings has been revised 10.4% upward over the past 60 days.

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.

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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.

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Axis Capital Holdings Limited (AXS) : Free Stock Analysis Report
 
United Microelectronics Corporation (UMC) : Free Stock Analysis Report
 
Oasis Petroleum Inc. (OAS) : Free Stock Analysis Report
 
SpartanNash Company (SPTN) : Free Stock Analysis Report
 
ArcBest Corporation (ARCB) : Free Stock Analysis Report
 
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