U.S. stocks surged last week, driven by optimism about the economy and expectations for interest rate cuts. The S&P 500 and Dow Jones Industrial Average saw their largest weekly gains since early November, while the Nasdaq Composite posted its best performance since December. This rally followed data showing core inflationary pressures easing and increased expectations for rate cuts by the Federal Reserve.
On Friday, the Dow Jones Industrial Average climbed 334.70 points, closing at 43,487.83, marking a 0.78% increase. The S&P 500 similarly advanced, gaining 59.32 points to close at 5,996.66, a rise of 1.00%. Meanwhile, the Nasdaq Composite surged 291.91 points, closing at 19,630.20, reflecting a robust 1.51% increase. Market sentiment remains cautiously optimistic about fiscal and monetary policies under the new administration.
In this environment, value stocks could draw attention as a compelling investment option. Often trading below their intrinsic value, they provide a margin of safety, which can be especially appealing amid market uncertainties.
When evaluating value stocks, one of the most effective valuation metrics is the Price to Cash Flow (P/CF) ratio. Companies like Tyson Foods, Inc. TSN, General Motors Company GM, Integra LifeSciences Holdings Corporation IART and EnerSys ENS boast a low P/CF ratio. The P/CF ratio evaluates the market price of a stock relative to the amount of cash flow that the company is generating on a per-share basis — the lower the number, the better.
Price to Cash Flow Reflects Financial Health
You must be wondering why we consider the P/CF valuation metric when the most widely used valuation metric is Price/Earnings (or P/E). An important factor that makes P/CF a highly dependable metric is that operating cash flow adds back non-cash charges such as depreciation and amortization to net income, truly diagnosing a company’s financial health.
Analysts caution that a company’s earnings are subject to accounting estimates and management manipulation. Then again, cash flow is quite reliable. Net cash flow unveils how much money a company generates and how effectively management is deploying the same.
Positive cash flow indicates an increase in the company’s liquid assets. This gives the company the means to settle debt, meet its expenses, reinvest in the business, endure downturns and finally undertake shareholder-friendly moves. Negative cash flow implies a decline in the company’s liquidity, which, in turn, lowers its flexibility to support these endeavors.
What’s the Best Value Investing Strategy?
An investment decision based solely on the P/CF metric may not yield the desired results. To identify stocks that are trading at a discount, you should expand your search criteria and also consider the price-to-book ratio, price-to-earnings ratio and price-to-sales ratio. Adding a favorable Zacks Rank and a Value Score of A or B to your search criteria should lead to even better results as these eliminate the chance of falling into a value trap.
Here are the parameters for selecting true-value stocks:
P/CF less than or equal to X-Industry Median.
Price greater than or equal to 5: The stocks must all be trading at a minimum of $5 or higher.
Average 20-Day Volume greater than 100,000: A substantial trading volume ensures that the stock is easily tradable.
P/E using (F1) less than or equal to X-Industry Median: This parameter shortlists stocks that are trading at a discount or are equal to their peers.
P/B less than or equal to X-Industry Median: A lower P/B compared with the industry average implies that there is enough room for the stock to gain.
P/S less than or equal to X-Industry Median: The P/S ratio determines how a stock price compares to the company’s sales — the lower the ratio, the more attractive the stock is.
PEG less than 1: The ratio is used to determine a stock's value by taking the company's earnings growth into account. The PEG ratio gives a more complete picture than the P/E ratio. A value of less than 1 indicates that the stock is undervalued and that investors need to pay less for a stock that has robust earnings growth prospects.
Zacks Rank less than or equal to 2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform irrespective of the market environment.
Value Score of less than or equal to B: Our research shows that stocks with a Style Score of A or B when combined with a Zacks Rank #1 or 2 offer the best upside potential.
Here are four of the nine value stocks that qualified the screening:
Tyson Foods, one of the world’s largest food companies and a recognized leader in protein, sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 57%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Tyson Foods’ current financial year sales and earnings per share (EPS) suggests growth of 2% and 13.6%, respectively, from the year-ago period. TSN has a Value Score of A. Shares of TSN have risen 6% in the past year.
General Motors, which designs, builds and sells cars, trucks, crossovers and automobile parts globally, sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 17.5%, on average.
The Zacks Consensus Estimate for General Motors’ current financial year sales and EPS suggests growth of 6.2% and 34.6%, respectively, from the year-ago period. General Motors has a Value Score of A. Shares of GM have rallied 44.3% in the past year.
See the Zacks Earnings Calendar to stay ahead of market-making news.
Integra LifeSciences, a leading global medical technology company, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 1.4%, on average.
The Zacks Consensus Estimate for Integra LifeSciences’ current financial year sales implies growth of 4.6% from the year-ago period. Integra LifeSciences has a Value Score of A. Shares of IART have fallen 44.1% in the past year.
EnerSys, the global leader in stored energy solutions for industrial applications, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 1.6%, on average.
The Zacks Consensus Estimate for EnerSys’ current financial year sales and EPS suggests growth of 3.4% and 11.7%, respectively, from the year-ago period. ENS has a Value Score of A. Shares of ENS were down 0.5% in the past year.
You can get the rest of the stock on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and back test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies is available at: https://www.zacks.com/performance.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
