October 30, 2020

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Should Value Investors Pick Newtek Business Services (NEWT)?

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Value investing is easily one of the most popular ways to find great stocks in...

Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?

One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Newtek Business Services Corp. NEWT stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:

PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.

On this front, Newtek Business Services has a trailing twelve months PE ratio of 8.82, as you can see in the chart below:

This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 stands at about 19.66. If we focus on the long-term PE trend, Newtek Business Services’s current PE level puts it above its midpoint (which is 14.55) over the past five years. Moreover, the current level stands well below the highs for the stock, suggesting that it can be a solid entry point.

Further, the stock’s PE also compares favorably with the Zacks Finance sector’s trailing twelve months PE ratio, which stands at 12.56. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.

We should also point out that Newtek Business Services has a forward PE ratio (price relative to this year’s earnings) of just 7.47, so it is fair to say that a slightly more value-oriented path may be ahead for Newtek Business Services stock in the near term too.

PEG Ratio

While earnings are certainly important, it is essential to know how much you are paying for the growth of earnings as well. One can easily do that with the PEG ratio (ratio of the P/E to the expected future earnings growth rate).The PEG ratio gives a more complete picture of the valuation of a stock than the P/E ratio.

Newtek Business Services’s PEG ratio stands at just 2.49, compared with the Zacks Finance industry average of 5.27. This suggests a decent undervalued trading relative to its earnings growth potential right now.

Broad Value Outlook

In aggregate, Newtek Business Services currently has a Value Score of B, putting it into the top 40% of all stocks we cover from this look. This makes Newtek Business Services a solid choice for value investors, and some of its other key metrics make this pretty clear too.

What About the Stock Overall?

Though Newtek Business Services might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth Score of B and a Momentum Score of C. This gives NEWT a Zacks VGM score — or its overarching fundamental grade — of B. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been robust at best. The current quarter has seen one estimate go higher in the past sixty days compared to none lower, while the full year estimate has seen one up and none down in the same time period.

This has had a noticeable impact on the consensus estimate though as the current quarter consensus estimate has skyrocketed in the past two months, while the full year estimate has increased by 12.3%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

Newtek Business Services Corp. Price and Consensus

Newtek Business Services Corp. Price and Consensus

Newtek Business Services Corp. price-consensus-chart | Newtek Business Services Corp. Quote

Despite the bullish trend, the stock has a Zacks Rank #3 (Hold) which is why we are looking for in-line performance from the company in the near term.

Bottom Line

Newtek Business Services is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. However, with a sluggish industry rank (among Bottom 11% of more than 250 industries) and a Zacks Rank #3, it is hard to get too excited about this company overall. In fact, over the past two years, the Zacks Financial – SBIC & Commercial industry has clearly underperformed the broader market, as you can see below:

So, value investors might want to wait for analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.

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