Zacks
5 Low P/B Stocks to Add to Your Portfolio in March
Kinjel Shah
7 min read

In This Article:

The task of spotting a discounted stock is quite difficult. Value investors have tried various ways to identify stocks trading at a discount to their actual value.

When you are a growth investor, you buy stocks with tremendous growth potential. However, value investing is different and involves picking stocks priced below their intrinsic value. Ironically, it requires investors to embrace stocks that are under the radar. Price-to-earnings (P/E) and price-to-book value (P/B) ratios are the favorite tools of value investors.

Though P/E is a more popular financial metric, the P/B ratio is also emerging as a convenient tool for identifying low-priced stocks that have high growth prospects. The ratio is used to compare a stock’s market value/price to its book value.

The P/B ratio is calculated as below:

P/B ratio = market price per share/book value of equity per share

The P/B ratio helps identify low-priced stocks with high growth prospects. General Motors Company GM, KT Corporation KT, The Greenbrier Companies GBX, Itron ITRI and Enersys ENS are some such stocks.

Now, let us understand the concept of book value.

What is Book Value?

There are several ways by which book value can be defined. 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 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 warning. 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.

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