Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?
One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Companhia de Saneamento SBS stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:
A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.
On this front, Companhia de Saneamento has a trailing twelve months PE ratio of 6.77, as you can see in the chart below:
This level is significantly favorable with the market at large, as the PE for the S&P 500 compares in at about 19.68. If we focus on the stock’s long-term PE trend, the current level puts Companhia de Saneamento’s current PE ratio somewhat below its midpoint (which is 9.91) over the past five years.
Further, the stock’s PE also compares favorably with the Zacks classified Utility – Water Supply industry’s trailing twelve months PE ratio, which stands at 17.27. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Companhia de Saneamento has a forward PE ratio (price relative to this year’s earnings) of 8.90, so it is fair to expect an increase in the company’s share price in the near future.
Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.
Right now, Companhia de Saneamento has a P/S ratio of about 1.41. This is substantially lower than the S&P 500 average, which comes in at 3.05 right now. Also, as we can see in the chart below, this is below the highs for this stock in particular over the past few years.
If anything, this suggests some level of undervalued trading—at least compared to historical norms.
Broad Value Outlook
In aggregate, Companhia de Saneamento currently has a Zacks Value Style Score of ‘A’, putting it into the top 20% of all stocks we cover from this look. This makes SBS a solid choice for value investors, and some of its other key metrics make this pretty clear too.
For example, For example, the P/CF ratio (another great indicator of value) comes in at 7.23, which is considerably better than the industry average of 11.12. Clearly, SBS is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though Companhia de Saneamento might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘D’ and a Momentum score of ‘A’. This gives SBS a Zacks VGM score—or its overarching fundamental grade—of ‘B’. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s recent earnings estimates have been encouraging. The full-year 2017 has seen one estimate go higher in the past sixty days, compared to none lower, while the full-year 2018 estimate has seen one upward and no downward revisions in the same time period.
This has had a positive impact on the consensus estimate, as the full-year 2017 consensus estimate has increased about 10.8% in the past two months, while the full-year 2018 estimate has risen by about 11.6%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
This positive trend signifies bullish analyst sentiment, and its Zacks Rank #2 (Buy) indicates robust fundamentals and expectations of outperformance in the near term.
Companhia de Saneamento is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Its strong Zacks Rank also indicates robust growth potential in the near future. However, the company’s prospects might be constrained due to adverse broader factors, as it has a sluggish industry rank (Bottom 40% out of more than 250 industries). In fact, over the past one year, the Zacks Utility – Water Supply sector has clearly underperformed the broader market, as you can see below:
So, value investors might want to wait for the broader factors to turn around in this name first, but once that happens, this stock could be a compelling pick.
Zacks' Hidden Trades
While we share many recommendations and ideas with the public, certain moves are hidden from everyone but selected members of our portfolio services. Would you like to peek behind the curtain today and view them?
Starting now, for the next month, I invite you to follow all Zacks' private buys and sells in real time from value to momentum…from stocks under $10 to ETF to option movers…from insider trades to companies that are about to report positive earnings surprises (we've called them with 80%+ accuracy). You can even look inside portfolios so exclusive that they are normally closed to new investors.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Companhia de saneamento Basico Do Estado De Sao Paulo – Sabesp (SBS): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research