One of the most common tools used to asses if a stock is trading at a high or low valuation is it price-to-earnings ratio (P/E). However, ratios vary enormously amongst different sectors of the economy. That is why, in order to know if a stock is overvalued or undervalued, one must compare its valuation ratios with those of its industry peers.
A low P/E ratio can imply that the market expects the company in question to underperform the wider market. However, it can also mean that the stock market has not yet caught up with the real value of the company, and the price is due for a correction, sooner or later. So, let’s take a look at three stocks that insiders have been buying (which can be interpreted as a bullish signal), which also trade at low P/E levels in order to elucidate if they stand as good investment options.
First off is ADT Corp (NYSE:ADT), a $5.4 billion market cap provider of electronic security, interactive home and business automation and related monitoring services. The company has already seen nine of its insiders buy its stock this year. Most recently, Naren Gursahaney, Chief Executive Officer, acquired 10,000 shares of Common Stock. On May 2, Mr. Gursahaney purchased 6,176 shares for $30.35 each, and another 3,824 shares for $30.296 each. He now owns 263,281 shares of the company, worth about $8.1 million. Another notable purchase this year was that of ADT’s CFO, Michael Geltzeiler, who acquired at the begging of March, 10,000 shares for prices ranging from $29.56 per share, to $29.60 per share. He now holds 31,900 shares of the company.
Fundamentally, ADT looks appealing. Its stock trades at 16.5 times the company’s earnings, versus an industry average of 29.4x, while it boasts industry leading margins and above average returns on equity and assets. However, above-average debt levels are concerning, so its financial standing must be further analyzed.
The second company in this list is MedAssets, Inc. (NASDAQ:MDAS), a $1.37 billion market cap provider of technology-enabled products and services. Although insider purchases hadn’t taken place for a few years now, this changed on May 2, when Halsey R Wise, Board Director, started a position in the stock with 8,950 shares of Common Stock, for which he paid prices ranging from $22.17 per share to $22.40 per share, inclusive. Once again, MedAssets trades below its industry average valuation of 62.1 x P/E, at 49.3x. Its valuation becomes even more attractive when one looks at the company´s P/B ratio (2.8x vs. an industry average of 15.6x) and P/S ratio (2.0x vs. 4.7x). However, below average margins, returns and growth projections are three major sources of concern.
Finally, there’s Unifi, Inc. (NYSE:UFI), a $421 million market cap diversified producer and processor of multi-filament polyester and nylon yarns. Fundamentally, the company looks attractive; above average returns and net margin, low debt levels and an industry leading growth history (over the past three years), make of this stock a good pick. In addition, the company trades at 16.3x P/E, compared to an industry mean of 27.9x, and is also sold at a discount valuation (compared to its peers) in relation to its sales and book-values.
Over the past few days, two Board Directors have been purchasing the company’s stock. Kenneth Langone procured 1,700 shares on May 2, and 1,700 shares on April 30. He now holds more than 1 million shares, through direct (986,629 shares) and indirect holdings. In addition, George R. Perkins Jr., bought, on May 1, 9,000 shares of Common Stock, for which he paid an average price of $21.756 per share. He now holds 354,380 Unifi shares.
Disclosure: Javier Hasse holds no position in any stocks mentioned