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Friday, December 3, 2021

Are gap stocks overvalued or undervalued?

Gap Inc shares lagged behind the S&P 500 in 2021, creating a total YTD loss of 9.2%.

Gap shares have surged in recent years, but investors may wonder if there is any value in Gap shares following the recent pullback.

Earnings

The price-to-earnings ratio (PE) is one of the most basic fundamental indicators for measuring the value of a stock. The lower the PE, the higher the value.

By comparison, the PE for the S&P 500 is currently around 29.6, nearly double the long-term average of 15.9. The PE Gap is 14.2, less than half the S&P 500 average overall.

Height

Looking ahead over the next four quarters, the S&P 500 PE forecast looks much more reasonable at just 21.4. The 9.4 Gap Forward Profit Ratio is still less than half of the S&P 500, so the Gap looks undervalued.

The forward PE Gap is also less than a third of the average consumer peers, which average 32.9 forward earnings.

However, when it comes to valuing stocks, profit is not everything.

Growth rates are also critical for companies that are rapidly growing their profits. The price-earnings-to-growth ratio (PEG) is a good way to incorporate growth into the valuation process. The overall PEG of the S&P 500 is currently around 1.0; The PEG Gap is 2.9, which suggests that the Gap is still overvalued for its growth.

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Price-to-sales ratio is another important valuation metric, especially for loss-making companies and growth stocks. The PS ratio for the S&P 500 is currently 3.22, well above its long-term average of 1.63. The PS Gap ratio is 0.55, which is the extreme discount to the S&P 500 average as a whole. PS Gap has also declined 37.8% over the past five years, indicating that the stock is priced at the bottom of its historical valuation range.

Finally, Wall Street analysts see the value of the Gap stock over the next 12 months. The average price target for the 20 analysts bridging the gap is $ 25.50, implying 39.5% upside from current levels.

Verdict

At current price, Gap shares appear to be undervalued based on a sample of general valuation fundamentals.

Wayne Duggan

© 2021 The Epoch Times. The Epoch Times does not provide investment advice. All rights reserved.

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