What are we looking for?
Companies that are undervalued relative to their sector.
Comparing stock valuations against the average multiples for their industry provides a different view than simply comparing stocks against each other, since it reflects how different sectors have different valuations. Ratios that would be considered cheap among technology shares, for example, might be considered expensive among retail companies.
More on today's screen
Bloomberg, the provider of financial data, news and services, created the screen. We adapted it to Canada's benchmark S&P/TSX composite index on Friday, and today we apply it to the S&P 500 for the United States. The filter picks up the most-undervalued stocks relative to their sector according to three criteria:
– price to earnings
– price to cash flow
– enterprise value (market capitalization plus debt minus cash) to trailing 12-month earnings before interest, taxes, depreciation and amortization, or Ebitda.
What did we find?
The screen picked up 249 companies, or almost half the companies in the S&P 500, and the table shows those that are the most undervalued. So it's not that difficult to find companies that trade at multiples significantly below the sector average.
Most of the stocks in today's screen have fallen by far more this year than the S&P 500. That's a large part of what makes them cheap. Some of the shares could be attractive to buy in a bet that their prices will rebound. But in other cases, their prices have plunged and the shares are at relatively low valuations for a reason, whether related to earnings, operations, management, the outlook or something else.
While investors shouldn't decide what to buy and sell based solely on screens such as this one, a filter can provide a helpful starting point for further research to identify promising stocks.