One out of the many investment strategies is value investing. Value investors are generally risk-averse traders who are continuously on the lookout for low-priced stocks that offer decent returns and are trading cheap compared to the broader industry.
However, this apparently simple value investment technique has some drawbacks and lack of proper understanding of the strategy may often lead to “value traps”. In such a situation, these value picks start to underperform over the long run as the temporary problems, which once drove the share price down, turn out to be persistent.
Given the large number of parameters required for gauging valuation, it is never easy to zero in on the most suitable value stock.
An Insight Into Zacks Methodology
Our latest style score system has made the task quite simple. It helps us choose stocks that have a solid performance record and might therefore prove to be a great choice for investors.
Our Value Style Score highlights all valuation metrics and represents them as one score that cautions investors regarding “value traps” and helps them find stocks that are actually trading at a discount.
Meanwhile, stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) reflects an upward trend in the stock’s earnings estimates. Our research shows that stocks with a Value Style Score of A or B when combined with a Zacks Rank #1 or 2 offer the best upside potential.
Based on this, we have identified a candidate Amedisys, Inc. (NASDAQ:AMED) , with a Zacks Rank #2 and a Value Score of B,which may prove to be a solid value pick.
What’s Working in Favor of Amedisys?
Amedisys has the most favorable VGM Score of A. Under the Zack Style Score system, V stands for Value, G for Growth and M for Momentum. The VGM Score is simply a weighted combination of these parameters and is a comprehensive tool that allows investors to filter through the standard scoring system and pick the winning stocks.
The company also has a favorable Price/Earnings to Growth (PEG) ratio of 1.25 when compared to the broader industry’s 1.94. PEG ratio is a more comprehensive valuation metric that evaluates the company's value while also considering its earnings growth potential.
Amedisys Inc PEG Ratio (TTM)
The stock has extremely attractive leverage ratios when compared with the broader industry. Leverage ratios are important informative tools that assess the financial composition of a company by measuring the amount of debt used to finance the total capital. Amedisys has an attractive Debt/Equity ratio of 16.9 as compared to the industry’s 125.5. Again, Long-Term Debt/Capital ratio metric at 14.4 stands in favor of Amedisys in comparison to 55.2 of the broader industry.
Amedisys Inc Debt to Equity Ratio (Quarterly)
Our next parameter is the return offered by the company to investors with respect to equity, asset and capital. Amedisys proves to be a great value pick as it generates better returns when compared to the broader industry. Return on Equity (ROE) for Amedisys stands at 13.7% when compared to 11.8% of the industry. Moreover, beating the industry’s 4% Return on Asset (ROA), Amedisys’ 8.6% is pretty impressive. Also, the company offers a substantially higher Return On Capital (ROC) of 11.6% when compared to the broader industry’s 5.2%.
Additionally, the company’s strong cash balance bolsters our confidence in the stock. Hence, Amedisys’ cash flow per share stands at a favorable 2.16 as compared to the broader industry’s 1.84.
Other Value Stocks to Consider
Other value picks in the medical sector that are worth mentioning are Masimo Corporation (NASDAQ:MASI) , Lantheus Holdings, Inc. (NASDAQ:LNTH) and VWR Corporation (NASDAQ:VWR) . You can see the complete list of today’s Zacks #1 Rank stocks here.
Masimo carries a Zacks Rank #2 and a Value Score of B.
Lantheus carries a Zacks Rank #2 and a Value Score of A.
VWR carries a Zacks Rank #2 and a Value Score of A.
One Simple Trading Idea
Since 1988, the Zacks system has more than doubled the S&P 500 with an average gain of +25% per year. With compounding, rebalancing, and exclusive of fees, it can turn thousands into millions of dollars.
This proven stock-picking system is grounded on a single big idea that can be fortune shaping and life changing. You can apply it to your portfolio starting today.
Masimo Corporation (MASI): Free Stock Analysis Report
Lantheus Holdings, Inc. (LNTH): Free Stock Analysis Report
Amedisys Inc (AMED): Free Stock Analysis Report
VWR Corporation (VWR): Free Stock Analysis Report
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Zacks Investment Research