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 General Motors Company GM 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, General Motors has a trailing twelve months PE ratio of 5.78, as you can see in the chart below:
This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 stands at about 19.93. If we focus on the long-term PE trend, General Motors’ current PE level puts it significantly below its midpoint over the past five years, with the number being more or less stable over the past few months.
Further, the stock’s PE also compares favorably with the Zacks classified Auto Manufacturers-Domestic industry’s trailing twelve months PE ratio, which stands at 9.18. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that General Motors has a forward PE ratio (price relative to this year’s earnings) of 6.17, 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, General Motors has a P/S ratio of about 0.35. This is much lower than the S&P 500 average, which comes in at 2.98 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, General Motors 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 General Motors a solid choice for value investors, and some of its other key metrics make this pretty clear too.
For example, the PEG ratio for General Motors is just 0.63, a level that is lower than the industry average of 1.23. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Clearly, GM is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though General Motors 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 ‘B’ and a Momentum score of ‘F’. This gives GM a Zacks VGM score—or its overarching fundamental grade—of ‘A’. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s recent earnings estimates have not been favorable. The current quarter has seen no estimate go higher in the past thirty days compared to one lower, while the full year estimate has seen one downward and no upward revision in the same time period.
As a result, the current quarter consensus estimate has dropped by 1.7% in the past one month, and the full year estimate has also been marginally revised lower. You can see the consensus estimate trend and recent price action for the stock in the chart below:
General Motors Company Price and Consensus
This bearish trend is why the stock has a Zacks Rank #4 (Sell) and why we fear that the company might disappoint in the near term.
General Motors is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Despite having a Zacks Rank #4, the stock belongs to an industry which is ranked among the Top 33%, which indicates that broader factors are favorable for the company. In fact, over the past one year, the Zacks Auto Manufacturers-Domestic industry has outperformed the broader market, as you can see below:
However, given the negative trend in earnings estimate revisions, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.
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