Investors interested in Retail – Discount Stores stocks are likely familiar with Dollar Tree (DLTR) and Costco (COST). But which of these two companies is the best option for those looking for undervalued stocks? Let’s take a closer look.
The best way to find great value stocks is to pair a strong Zacks Rank with an impressive grade in the Value category of our Style Scores system. The proven Zacks Rank emphasizes companies with positive estimate revision trends, and our Style Scores highlight stocks with specific traits.
Dollar Tree has a Zacks Rank of #2 (Buy), while Costco has a Zacks Rank of #3 (Hold) right now. Investors should feel comfortable knowing that DLTR likely has seen a stronger improvement to its earnings outlook than COST has recently. But this is just one factor that value investors are interested in.
Value investors are also interested in a number of tried-and-true valuation metrics that help show when a company is undervalued at its current share price levels.
The Style Score Value grade factors in a variety of key fundamental metrics, including the popular P/E ratio, P/S ratio, earnings yield, cash flow per share, and a number of other key stats that are commonly used by value investors.
DLTR currently has a forward P/E ratio of 18.46, while COST has a forward P/E of 39.10. We also note that DLTR has a PEG ratio of 1.52. This figure is similar to the commonly-used P/E ratio, with the PEG ratio also factoring in a company’s expected earnings growth rate. COST currently has a PEG ratio of 4.46.
Another notable valuation metric for DLTR is its P/B ratio of 4.23. The P/B ratio pits a stock’s market value against its book value, which is defined as total assets minus total liabilities. For comparison, COST has a P/B of 11.56.
Based on these metrics and many more, DLTR holds a Value grade of B, while COST has a Value grade of C.
DLTR 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 DLTR is likely the superior value option right now.
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