Investors generally tend to cling to the price-to-earnings (P/E) metric while looking for bargain stocks. In addition to being a widely used tool for screening stocks, P/E is also a popular metric to work out the fair market value of a company. But even this ubiquitously used valuation multiple has a few downsides.
Although P/E is the most popular valuation metric, a more complicated multiple called EV-to-EBITDA works even better. Often considered a better alternative to P/E, it gives the true picture of a company’s valuation and earnings potential and has a more complete approach to valuation. While P/E considers a firm’s equity portion, EV-to-EBITDA determines its total value.
First American Financial Corporation FAF, AMN Healthcare Services, Inc. AMN, Cenovus Energy Inc. CVE, PG&E Corporation PCG and Safehold Inc. SAFE are some stocks with impressive EV-to-EBITDA ratios.
Here’s Why EV-to-EBITDA Is a Better Option
Also referred to as enterprise multiple, EV-to-EBITDA is the enterprise value (EV) of a stock divided by its earnings before interest, taxes, depreciation and amortization (EBITDA). EV is the sum of a company’s market capitalization, its debt and preferred stock minus cash and cash equivalents. In essence, it is the entire value of a company. EBITDA, the other element, gives a clearer picture of a company’s profitability by removing the impact of non-cash expenses such as depreciation and amortization that dampen net earnings. It is also often used as a proxy for cash flows.
Typically, the lower the EV-to-EBITDA ratio, the more enticing it is. A low EV-to-EBITDA ratio could indicate that a stock is undervalued. Unlike the P/E ratio, EV-to-EBITDA takes debt on a company’s balance sheet into account. For this reason, it is typically used to value acquisition targets. The ratio shows the amount of debt that the acquirer has to bear. Stocks flaunting a low EV-to-EBITDA multiple could be seen as attractive takeover candidates.
P/E can’t be used to value a loss-making firm. A firm’s earnings are also subject to accounting estimates and management manipulation. In contrast, EV-to-EBITDA is harder to manipulate and can be used to value companies that have negative net earnings but are positive on the EBITDA front. EV-to-EBITDA is also a useful tool in measuring the value of firms that are highly leveraged and have a high degree of depreciation. It can also be used to compare companies with different levels of debt.
EV-to-EBITDA is not devoid of limitations and alone cannot conclusively determine a stock’s inherent potential and future performance. The multiple varies across industries and is usually not appropriate when comparing stocks in different industries, given their diverse capital expenditure requirements.
Thus, instead of just relying on EV-to-EBITDA, you can club it with the other major ratios, such as price-to-book (P/B), P/E and price-to-sales (P/S) to achieve the desired results.
Screening Criteria
Here are the parameters to screen for bargain stocks:
EV-to-EBITDA 12 Months-Most Recent less than X-Industry Median: A lower EV-to-EBITDA ratio represents a cheaper valuation.
P/E using (F1) less than X-Industry Median: This metric screens stocks that are trading at a discount to their peers.
P/B less than X-Industry Median: A lower P/B compared with the industry average implies that the stock is undervalued.
P/S less than X-Industry Median: The lower the P/S ratio, the more attractive the stock is, as investors will have to pay a smaller price for the same amount of sales generated by the company.
Estimated One-Year EPS Growth F(1)/F(0) greater than or equal to X-Industry Median: This parameter will help in screening stocks that have growth rates higher than the industry median.
Average 20-day Volume greater than or equal to 100,000: The addition of this metric ensures that shares can be traded easily.
Current Price greater than or equal to $5: This parameter will help in screening stocks that are trading at a minimum price of $5 or higher.
Zacks Rank less than or equal to 2: It is a fundamental truth that stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have always managed to beat adversities and outperform the market.
Value Score of less than or equal to B: Our research shows that stocks with a Value Score of A or B, when combined with a Zacks Rank #1 or 2, offer the best upside potential.
Here are our five picks out of the 17 stocks that passed the screen:
First American Financial serves homebuyers and sellers, real estate professionals, loan originators and servicers, commercial property professionals, homebuilders and others involved in residential and commercial property transactions with products and services specific to their needs. This Zacks Rank #1 stock has a Value Score of A.
First American Financial has an expected earnings growth rate of 11.1% for 2026. The Zacks Consensus Estimate for FAF’s 2026 earnings has been revised 6.3% upward over the past 60 days.
AMN Healthcare Services is a travel healthcare staffing company. Its business has evolved beyond traditional healthcare staffing and recruitment services, thereby becoming a strategic total talent solutions partner with its clients. This Zacks Rank #1 stock has a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
AMN Healthcare Services has an expected year-over-year earnings growth rate of 41.9% for 2026. The consensus estimate for AMN’s 2026 earnings has been revised 32.2% upward over the past 60 days.
Cenovus Energy is a leading integrated energy firm with operations comprising marketing the produced oil, natural gas and natural gas liquids. This Zacks Rank #1 stock has a Value Score of B.
Cenovus Energy has an expected year-over-year earnings growth rate of 48.1% for 2026. The Zacks Consensus Estimate for CVE’s 2026 earnings has moved up 101.8% over the past 60 days.
PG&E, through its subsidiary Pacific Gas and Electric Company, engages in the business of electricity and natural gas distribution; electricity generation, procurement, and transmission; and natural gas procurement, transportation and storage. This Zacks Rank #2 company has a Value Score of A.
PG&E has an expected year-over-year earnings growth rate of 10% for 2026. The consensus estimate for PCG’s 2026 earnings has been revised 0.6% upward over the past 60 days.
Safehold is a real estate investment trust, which helps owners of high-quality multifamily, office, industrial, hospitality, student housing, life science and mixed-use properties generate higher returns with less risk. This Zacks Rank #2 stock has a Value Score of B.
The consensus estimate for Safehold’s 2026 earnings has moved up 1.8% over the past 60 days. SAFE has a trailing four-quarter earnings surprise of roughly 1.2%, on average.
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Pacific Gas & Electric Co. (PCG): Free Stock Analysis Report
First American Financial Corporation (FAF): Free Stock Analysis Report
Cenovus Energy Inc (CVE): Free Stock Analysis Report
AMN Healthcare Services Inc (AMN): Free Stock Analysis Report
Safehold Inc. (SAFE): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).