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Is Diversified Healthcare (DHC) a Great Stock for Value Investors?

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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 Diversified Healthcare Trust (DHC - Free Report) 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, Diversified Healthcare has a trailing twelve months PE ratio of 10.05, as you can see in the chart below:

Zacks Investment Research
Image Source: Zacks Investment Research

This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 stands at about 28.31. If we focus on the long-term PE trend, Diversified Healthcare’s current PE level puts it above its midpoint (which is 9.5) over the past five years, with the number having risen rapidly over the past few months.

Zacks Investment Research
Image Source: Zacks Investment Research

Further, the stock’s PE also compares favorably with the Zacks Finance sector’s trailing twelve months PE ratio, which stands at 18.65. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.

Zacks Investment Research
Image Source: Zacks Investment Research

We should also point out that Diversified Healthcare has a forward PE  ratio (price relative to this year’s earnings) of just 28.86, which is higher than the current level. So, it is fair to expect an increase in the company’s share price in the near term.

P/S Ratio

Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.

Right now, Diversified Healthcare has a P/S ratio of about 0.63. This is a bit lower than the S&P 500 average, which comes in at 5.29x right now. Also, as we can see in the chart below, this is well below the highs for this stock in particular over the past few years.

Zacks Investment Research
Image Source: Zacks Investment Research

If anything, this suggests some level of undervalued trading—at least compared to historical norms.

Broad Value Outlook

In aggregate, Diversified Healthcare currently has a Value Score of A, putting it into the top 20%  of all stocks we cover from this look. This makes Diversified Healthcare a solid choice for value investors, and some of its other key metrics make this pretty clear too.

For example, the PEG ratio for Diversified Healthcare is just 2.89, a level that is far lower than the industry average of 3.16. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Clearly, DHC is a solid choice on the value front from multiple angles.

What About the Stock Overall?

Though Diversified Healthcare 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 D and a Momentum Score of F. This gives DHC a Zacks 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 sluggish at best. The current quarter consensus estimate has dropped by 33.3% in the past two months, while the full year estimate has declined by 22.2%. You can see the consensus estimate trend and recent price action  for the stock in the chart below:

Diversified Healthcare Trust Price and Consensus

This negative trend is why the stock has just a Zacks Rank #3 (Hold) despite strong value metrics and why we are looking for in-line performance from the company in the near term.

Bottom Line

Diversified Healthcare 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 35% 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 REIT and Equity Trust – Other industry has clearly underperformed the broader market, as you can see below:

Zacks Investment Research
Image Source: Zacks Investment Research

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


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