Zacks Investment Research | Jul 21, 2019 09:40PM ET
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 CarMax, Inc. (NYSE:KMX) 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:
PE Ratio
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, CarMax has a trailing twelve months PE ratio of 16.8, as you can see in the chart below:
This level actually compares favorably with the market at large, as the PE for the S&P 500 stands at about 18.39. Also, if we focus on the long-term PE trend, CarMax’s current PE level puts it below its midpoint of 18.62 over the past five years.
The stock’s PE compares quite favorably with the Retail-Wholesale Market’s trailing twelve months PE ratio, which stands at 28.01. This indicates that the stock is undervalued right now, compared to its peers.
Meanwhile, CarMax has a forward PE ratio (price relative to this year’s earnings) of 16.10, which is slightly lower than the current level. So, it is fair to say that a slightly more value-oriented path may be ahead for CarMax stock in the near term too.
P/S Ratio
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, CarMax has a P/S ratio of just 0.76. This is much lower than the S&P 500 average, which comes in at 3.32x right now. Also, as we can see in the chart below, this is much below the highs for this stock in particular over the past few years.
Broad Value Outlook
In aggregate, CarMax currently has a Value Score of A, putting it into the top 20% of all stocks we cover from this look. This makes CarMax a solid choice for value investors and some of its other key metrics make this pretty clear too.
For example, the PEG ratio for CarMax is just 1.28, a level that is lower than the industry average of 1.50. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate.
What About the Stock Overall?
Though CarMax 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 Score of C and a Momentum Score of A. This gives KMX a Zacks VGM score — or its overarching fundamental grade — of A. (You can read more about the Zacks Style Scores CarMax, Inc. Quote
Such bullish analyst sentiments is the reason why the stock has a Zacks Rank #2 (Buy) and why we are looking for outperformance from the company in the near term.
Bottom Line
CarMax is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. A strong industry rank (among Top 25% of more than 250 industries) and Zacks Rank #2 instill investors’ optimism in the stock.
Also, over the past two years, the broader industry has clearly outperformed the market at large, as you can see below:
We believe, a satisfactory past industry performance, a good industry and Zacks rank signal that the stock is likely to benefit from favorable broader factors in the immediate future. Add to this robust value metrics, and we believe that we have a strong value contender in KMX.
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