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 CalAtlantic Group, Inc. CAA 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, CalAtlantic has a trailing twelve months PE ratio of 9.80. This level compares pretty favorably with the market at large, as the PE ratio for the S&P 500 comes in at about 19.93.
If we focus on the long-term trend of the stock the current level puts CalAtlantic’s current PE near its historical lows.
The current PE is well below its median for the term (which stands at 17.00), and the number has been falling rapidly since the highs of 2012. Thus, the present level seems to be a suitable entry point for the stock in this respect.
Since a stock’s PE is based on only two inputs, we tried to figure out the reason behind the consistently falling PE metric. It could either be constantly bad price performance or a favorable earnings trend. We find that in the case of CalAtlantic, steady earnings growth has been the driving factor for the falling PE multiple, as can be figured out from the graph below:
The future earnings estimation also breeds optimism for the stock. In fact, the forward PE (price relative to this year’s earnings) for the stock stands at 8.47, further justifying that a slightly more value-oriented path may be ahead for the company in the near term.
Currently, the stock’s PE also compares favorably with the Zacks classified Building Products – Home Builders industry’s trailing twelve months PE ratio, which stands at 11.81. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
The above chart depicts the PE trend as compared with the industry (we have excluded the outliers experienced in 2012 to make the trend clearer). Thus, we can see that over the last one year, CalAtlantic has been trading consistently cheaper than its close peers.
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, CalAtlantic has a P/S ratio of about 0.73. This is lower than the Zacks categorized Building – Residential Commercial industry average, which comes in at 0.89 right now. Also, as we can see in the chart below, this is well below the highs for this stock in particular over the past few years.
This clearly suggests some level of undervalued trading for CAA—at least compared to historical norms.
Broad Value Outlook
In aggregate, CalAtlantic currently has a Zacks Value Style Score of ‘B’, putting it into the top 40% of all stocks we cover from this look. This makes CalAtlantic a solid choice for value investors, and some of its other key metrics make this pretty clear too.
For example, the PEG ratio for CalAtlantic is just 0.62, lower than the industry average of 0.79. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Clearly, CAA is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though CalAtlantic 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 ‘A’ and a Momentum score of ‘A’. This gives CAA a Zacks VGM score—or its overarching fundamental grade—of ‘A’. (You can read more about the Zacks Style Scores here >>)
Our VGM Score identifies stocks that have the most attractive value, growth, and momentum characteristics, and a good VGM score can increase your odds of success. All things considered, CalAtlantic seems to have pretty striking prospects.
However, the company’s recent earnings estimates have been going down lately. The current quarter has seen two estimates go lower in the past sixty days compared to none lower, while the full year estimate has seen one estimate revised downward versus none upward in the same time period.
This has had a small but meaningful impact on the consensus estimate, as the current quarter consensus estimate has moved down 2.7% in the past two months, while the full year estimate has declined 0.9%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
CalAtlantic Group, Inc. Price and Consensus
The combination of these somewhat mixed factors is why the stock has just a Zacks Rank #3 (Hold) and why we are looking for in-line performance from the company in the near term.
CalAtlantic is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. However, with a somewhat sluggish industry rank (Bottom 48% out of more than 250 industries) and a Zacks Rank #3, it is hard to get too excited about this company overall.
The homebuilding industry has been experiencing margin pressures in the form of increasing labor rates and rising building material costs. Moreover, at present, a shortage of buildable lots, skilled labor and available capital for smaller builders are limiting home production, thereby lowering the inventory of homes, both new and existing.
Notably, the industry has underperformed the broader market over the last two years, as you can see below:
Despite such negative broader factors, the fact remains that CalAtlantic has achieved phenomenal earnings growth and its price has not yet appreciated enough to reflect the same. This indicates that the company remains a strong value proposition.
So, value investors might want to wait for analyst sentiment to turn bullish in this name first, but once that happens, this stock could be a compelling pick.
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