U.S. stock markets displayed mixed reactions on Monday as investors awaited the Federal Reserve's upcoming decision on interest rates, a critical factor expected to shape the course of the market in the New Year. The S&P 500 edged up 0.4%, closing at 6,074.08, while the Nasdaq Composite rose 1.2% to a record 20,173.89. Conversely, the Dow Jones Industrial Average dipped 0.3%, ending at 43,717.48.
The Federal Reserve is likely to announce another rate cut this week, continuing its accommodative monetary stance. However, market participants expect the central bank to signal a slower pace of reductions moving forward, a potential pivot that could impact investor strategies. In this environment, value stocks stand out as a compelling investment option. Trading below their intrinsic value, these stocks offer a margin of safety during market fluctuations.
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, Fresenius Medical Care AG FMS and Deluxe Corporation DLX 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
Value investing is considered one of the best practices when it comes to picking stocks. It is essentially about selecting stocks that are fundamentally sound but have been beaten down by some external factors. Such stocks are poised to bounce back as and when investors recognize the inherent value of companies. Certainly, the value investment strategy best suits investors with a long-term horizon.
There are different valuation metrics to determine a stock’s inherent strength. Still, a random selection of a ratio cannot serve your purpose if you want a realistic assessment of a company’s financial position. For this, the Price to Cash Flow (or P/CF) ratio is one of the key metrics.
Price-to-Cash-Flow metric 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. One of the important factors 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. However, cash flow is reliable. Net cash flow unveils how much money a company is actually generating and how effectively management is deploying the same.
Positive cash flow indicates an increase in a company’s liquid assets. It gives the company the means to settle debt, meet its expenses, reinvest in its business, endure downturns and finally pay back its shareholders. Negative cash flow implies a decline in the company’s liquidity, which in turn lowers its flexibility to support these moves.
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 Zacks Rank #1 or 2, offer the best upside potential.
Here are four of the 10 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 13.2%, respectively, from the year-ago period. TSN has a Value Score of A. Shares of TSN have risen 15.5% in the past year.
General Motors, which designs, builds, and sells cars, trucks, crossovers, and automobile parts globally, carries a Zacks Rank #2. 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 4.8% and 34.8%, respectively, from the year-ago period. General Motors has a Value Score of A. Shares of GM have rallied 47.4% in the past year.
See the Zacks Earnings Calendar to stay ahead of market-making news.
Fresenius Medical Care, the world's leading provider of products and services for individuals with renal diseases, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 19%, on average.
The Zacks Consensus Estimate for Fresenius Medical’s current financial year EPS suggests growth of 11.5% from the year-ago period. FMS has a Value Score of A. Shares of FMS have advanced 15.3% in the past year.
Deluxe Corporation, with more than 100 years of expertise, provides innovative payment and data solutions that support businesses at every stage, processing more than $2 trillion annually and serving millions of clients worldwide. The stock currently carries a Zacks Rank #2.
Deluxe has a trailing four-quarter earnings surprise of 18.4%, on average. DLX has a Value Score of A. Shares of Deluxe have jumped 21.9% in the past year.
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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 are available at: https://www.zacks.com/performance.
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