Should Value Investors Consider Heritage Commerce (HTBK) Stock?

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 Heritage Commerce Corp HTBK 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, Heritage Commerce has a trailing twelve months PE ratio of 19.9, 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 compares in at about 21.3. If we focus on the stock’s long-term PE trend, the current level puts Heritage Commerce’s current PE ratio slightly below its midpoint (which is 20.7) over the past five years.

However, the stock’s PE also compares unfavorably with the industry’s trailing twelve months PE ratio, which stands at 19.4. At the very least, this indicates that the stock is relatively overvalued right now, compared to its peers.

Nonetheless, we should also point out that Heritage Commerce has a forward PE ratio (price relative to this year’s earnings) of just 19.4, so it is fair to say that a slightly more value-oriented path may be ahead for Heritage Commerce’s 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.

Heritage Commerce’s PEG ratio stands at just 1.7, compared with the industry average of 1.8. This suggests a slightly undervalued trading relative to its earnings growth potential right now.

Broad Value Outlook

In aggregate, Heritage Commerce currently has a Value Style Score of B, putting it into the top 40% of all stocks we cover from this look. This makes HTBK a solid choice for value investors.

What About the Stock Overall?

Though Heritage Commerce 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 grade of D and a Momentum score of B. This gives HTBK a VGM score—or its overarching fundamental grade—of C. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been encouraging. 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 a similar trend in the same time period.

This has had a favorable impact on the consensus estimate, as the current quarter consensus estimate has risen about 4.5% in the past two months, while the full year estimate has increased about 1.3%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

Heritage Commerce Corp Price and Consensus

Heritage Commerce Corp Price and Consensus | Heritage Commerce Corp Quote

This favorable trend is why the stock has just a Zacks Rank #2 (Buy) and why we are looking for better performance from the company in the near term.

Bottom Line

Heritage Commerce is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Boasting a decent industry rank (top 43% out of more than 250 industries) and a strong Zacks Rank, the company deserves attention right now. However, over the past one year, the sector has clearly underperformed the broader market, as you can see below:

Despite positive estimate revision activity, investors should wait for industry trends to turn around first.  When it does, this stock could be a compelling value pick.

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