The search for undervalued companies is a central part of value investing, a method that aims to find stocks trading for less than their true business worth. This method, supported by investors like Benjamin Graham and Warren Buffett, uses fundamental analysis to find differences between a company's market price and its actual value. One organized way to use this idea is by looking for stocks that show good financial strength and earnings, but are priced low by the market. A "Decent Value" screen does this, selecting companies with high valuation scores, meaning they are inexpensive compared to their financial numbers, while still holding acceptable scores in growth, earnings, and financial condition. This mix indicates a stock might be ignored or priced too low, not because of weak business health, but possibly because of temporary market feelings.
A present candidate from this screen is Academy Sports & Outdoors Inc (NASDAQ:ASO), a large sporting goods and outdoor recreation retailer. The company's detailed fundamental report, found here, gives a thorough numerical breakdown across five important areas. For a value investor, this report gives a structured way to evaluate if ASO's current market price offers a safety buffer compared to its business fundamentals.
Appealing Valuation Measures
The most persuasive starting place for a value investor is a stock's valuation, as it directly relates to the main question of price versus value. ASO gets a 7 out of 10 in the Valuation score, putting it in the high group of its industry for low price. This score comes from several important ratios that indicate the stock is trading at a notable discount.
- Price-to-Earnings (P/E) Ratio: At 9.26, ASO's P/E ratio is much lower than the industry average of 33.45 and the S&P 500 average of 26.39. The report shows that over 90% of its specialty retail peers are more costly on this measure.
- Forward P/E Ratio: Looking forward, the valuation stays low with a forward P/E of 8.33, which is less expensive than almost 92% of industry competitors.
- Enterprise Value to EBITDA: This measure, which includes debt, also suggests a "somewhat low valuation," with ASO being less costly than about 79% of its industry peers.
For an investor using a value method, these measures are key. They give a numerical basis for the view that the market may be pricing ASO's earnings ability too low, creating a possible chance if the difference between price and true value narrows.
Good Earnings Support the Low Price
An inexpensive stock is only a good investment if the basic company is financially healthy and profitable. A low P/E ratio loses its attraction if earnings are falling for good. Here, ASO shows clear strength, reaching a high Profitability score of 8 out of 10. This solid earnings performance validates the company's operations and provides the profits that make its low valuation significant.
- Good Margins: The company's profit margin of 6.27% and operating margin of 8.26% are higher than about 80% and 78% of industry peers, in order. Both margins have increased in recent years.
- Effective Capital Use: ASO's Return on Equity (17.55%) and Return on Invested Capital (9.26%) are better than a large majority of competitors, showing management is using shareholder money well to create profits.
- Steady History: The report states ASO has been profitable and produced positive operating cash flow for the past five years, adding a degree of consistency to its earnings picture.
This steady profitability is necessary for the value argument. It indicates the business is stable and able to maintain itself, lowering the chance that the low valuation is a permanent "value trap" caused by a failing company.
Evaluating Financial Condition and Growth
Value investing needs patience, as it can require time for the market to see a stock's worth. Therefore, a company must have the financial strength to endure economic changes and the possibility for growth to increase future value. ASO's Financial Health score is a neutral 6, presenting a varied but generally acceptable situation.
- Solvency Positives: The company has a low debt-to-equity ratio of 0.22 and a good debt-to-free-cash-flow ratio of 2.54, showing it is not too dependent on debt and could reduce debts fast from its cash flow.
- Liquidity Note: A point of attention is the low Quick Ratio (a measure of immediate liquidity), which the report marks as a possible near-term issue. However, a normal Current Ratio suggests overall short-term financial duties are acceptable.
- Moderate Growth Picture: With a Growth score of 4, ASO is not a high-growth stock, but it shows steadiness. While last year saw a decrease in earnings and revenue, the long-term pattern shows average yearly EPS growth of over 33% and expected future yearly EPS growth of almost 10%. Revenue growth is also expected to increase a little.
For a value method, moderate growth combined with financial stability is often better than fast but uncertain expansion. It shows the company can build value over time without accepting too much risk, matching the patient, long-term view of value investing.
Summary: A Candidate for the Value Watchlist
Academy Sports & Outdoors Inc presents a picture that matches several important ideas of value investing. The stock trades at a clear discount to both the wider market and its industry, as shown by its strong Valuation score. This discount is not joined with poor fundamentals; instead, it is paired with solid profitability and a generally healthy financial setup. The moderate growth expectations suggest a stable, not speculative, business. While investors should note the specific liquidity measure and do their own complete research, ASO's mix of a low price and acceptable fundamentals makes it an interesting candidate for more review by those using a value-focused method.
Find More Possible Value Opportunities The "Decent Value" screen that found ASO can be used to locate other stocks with similar pictures. You can view the present results of this screening method here.
Disclaimer: This article is for information only and does not make up financial advice, a suggestion, or an offer to buy or sell any securities. The analysis is based on data and scores from ChartMill, and investors should do their own separate research and talk with a qualified financial advisor before making any investment choices. Past performance does not show future results.
