Investors looking for stocks in the Medical - HMOs sector might want to consider either Select Medical (SEM) or Humana (NYSE:HUM). But which of these two companies is the best option for those looking for undervalued stocks? Let's take a closer look.
Everyone has their own methods for finding great value opportunities, but our model includes pairing an impressive grade in the Value category of our Style Scores system with a strong Zacks Rank. The Zacks Rank is a proven strategy that targets companies with positive earnings estimate revision trends, while our Style Scores work to grade companies based on specific traits.
Right now, Select Medical is sporting a Zacks Rank of #2 (Buy), while Humana has a Zacks Rank of #3 (Hold). This system places an emphasis on companies that have seen positive earnings estimate revisions, so investors should feel comfortable knowing that SEM is likely seeing its earnings outlook improve to a greater extent. But this is only part of the picture for value investors.
Value investors also tend to look at a number of traditional, tried-and-true figures to help them find stocks that they believe are undervalued at their current share price levels.
The Value category of the Style Scores system identifies undervalued companies by looking at a number of key metrics. These include the long-favored P/E ratio, P/S ratio, earnings yield, cash flow per share, and a variety of other fundamentals that help us determine a company's fair value.
SEM currently has a forward P/E ratio of 18.64, while HUM has a forward P/E of 20.31. We also note that SEM has a PEG ratio of 1.33. This metric is used similarly to the famous P/E ratio, but the PEG ratio also takes into account the stock's expected earnings growth rate. HUM currently has a PEG ratio of 1.51.
Another notable valuation metric for SEM is its P/B ratio of 3.88. The P/B ratio is used to compare a stock's market value with its book value, which is defined as total assets minus total liabilities. For comparison, HUM has a P/B of 4.16.
Based on these metrics and many more, SEM holds a Value grade of A, while HUM has a Value grade of C.
SEM is currently sporting an improving earnings outlook, which makes it stick out in our Zacks Rank model. And, based on the above valuation metrics, we feel that SEM is likely the superior value option right now.
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