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4 Low P/CF Stocks to Turn Market Volatility Into Opportunity
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The U.S. stock market witnessed a steep decline on Aug 2, 2024, amid growing concerns that the economy is losing steam under the strain of high interest rates intended to combat inflation. The major indices retreated sharply, with the S&P 500 dropping 1.8%, the Nasdaq Composite falling 2.4% and the Dow Jones Industrial Average sliding 1.5%.
Investors were rattled by a weaker-than-expected July jobs report, which signaled a significant slowdown in hiring. The economy added only 114,000 jobs, well below the market’s expectations of 175,000 and a sharp decline from June’s revised figure of 179,000. The unemployment rate climbed to 4.3% from 4.1%, marking its highest level since October 2021, reflecting a sudden and concerning reversal in labor market dynamics.
The tech sector bore the brunt of the market downturn, exacerbated by underwhelming earnings reports that fueled additional selling pressure. Adding to the apprehension, the recent data from the Institute for Supply Management indicated a contraction in U.S. manufacturing activity for the fourth straight month, underscoring broader economic challenges.
This pivotal juncture underscores the importance of a diversified investment approach. We always try to hit the jackpot while picking stocks. But striking the right chord each time is not easy unless blessed with Midas touch. When it comes to the investment market, experts consider value style to be one of the most effective approaches. Value investing is essentially about selecting stocks that have good things going on for them, even at a time when they have been beaten down by some external factors.
There are different valuation metrics to determine a stock’s inherent strength but a random selection of ratios cannot serve your purpose if you want a realistic assessment of a company’s financial position. For this, we recommend Price to Cash Flow (or P/CF) as one of the key metrics. This 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. Universal Health Services, Inc. (UHS - Free Report) , General Motors Company (GM - Free Report) , Unum Group (UNM - Free Report) and PVH Corp. (PVH - Free Report) boast a low P/CF ratio.
Price to Cash Flow Reveals Financial Health
Questions may arise as to why we are considering the Price to Cash Flow valuation metric when the most widely used metric is Price/Earnings (or P/E). Well, what makes P/CF stand out is that operating cash flow adds back non-cash charges such as depreciation and amortization to net income, truly reflecting the financial health of a company.
Analysts caution that a company’s earnings are subject to accounting estimates and management manipulation. However, cash flow is reliable. It is net cash flow that reveals how much money a company is actually generating and how effectively management is putting the same to use.
A positive cash flow indicates an increase in the company’s liquid assets. This gives the company the means to settle debt, shell out for its expenses, reinvest in its business, endure downturns and finally pay back its shareholders. Then again, a 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 Strategy?
An investment decision solely based on the P/CF metric may not fetch 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 portrays 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 15 stocks that qualified the screening.
Universal Health Services, one of the nation's largest hospital companies, operating through its subsidiaries, acute care hospitals, behavioral health facilities and ambulatory centers, sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 14.6%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Universal Health Services’ current financial year sales and EPS suggests growth of 9.8% and 42.6%, respectively, from the year-ago period. Universal Health Services has a Value Score of A. Shares of UHS have risen 56% 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 18.8%, on average.
The Zacks Consensus Estimate for General Motors’ current financial year sales and EPS suggests growth of 3.8% and 28.5%, respectively, from the year-ago period. General Motors has a Value Score of A. Shares of GM have risen 11% in the past year.
Unum Group, which provides financial protection benefit solutions, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 3%, on average.
The Zacks Consensus Estimate for Unum Group’s current financial year sales and EPS suggests growth of 4.2% and 8.8%, respectively, from the year-ago period. Unum Group has a Value Score of A. Shares of UNM have gained 6.9% in the past year.
PVH Corp., which operates as an apparel company, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 10.1%, on average.
The Zacks Consensus Estimate for PVH’s current financial year EPS suggests growth of 5.2% from the year-ago period. PVH has a Value Score of A. Shares of PVH have gained 8.8% in the past year.
You can get the rest of the stocks 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 backtest 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.
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.
Image: Bigstock
4 Low P/CF Stocks to Turn Market Volatility Into Opportunity
The U.S. stock market witnessed a steep decline on Aug 2, 2024, amid growing concerns that the economy is losing steam under the strain of high interest rates intended to combat inflation. The major indices retreated sharply, with the S&P 500 dropping 1.8%, the Nasdaq Composite falling 2.4% and the Dow Jones Industrial Average sliding 1.5%.
Investors were rattled by a weaker-than-expected July jobs report, which signaled a significant slowdown in hiring. The economy added only 114,000 jobs, well below the market’s expectations of 175,000 and a sharp decline from June’s revised figure of 179,000. The unemployment rate climbed to 4.3% from 4.1%, marking its highest level since October 2021, reflecting a sudden and concerning reversal in labor market dynamics.
The tech sector bore the brunt of the market downturn, exacerbated by underwhelming earnings reports that fueled additional selling pressure. Adding to the apprehension, the recent data from the Institute for Supply Management indicated a contraction in U.S. manufacturing activity for the fourth straight month, underscoring broader economic challenges.
This pivotal juncture underscores the importance of a diversified investment approach. We always try to hit the jackpot while picking stocks. But striking the right chord each time is not easy unless blessed with Midas touch. When it comes to the investment market, experts consider value style to be one of the most effective approaches. Value investing is essentially about selecting stocks that have good things going on for them, even at a time when they have been beaten down by some external factors.
There are different valuation metrics to determine a stock’s inherent strength but a random selection of ratios cannot serve your purpose if you want a realistic assessment of a company’s financial position. For this, we recommend Price to Cash Flow (or P/CF) as one of the key metrics. This 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. Universal Health Services, Inc. (UHS - Free Report) , General Motors Company (GM - Free Report) , Unum Group (UNM - Free Report) and PVH Corp. (PVH - Free Report) boast a low P/CF ratio.
Price to Cash Flow Reveals Financial Health
Questions may arise as to why we are considering the Price to Cash Flow valuation metric when the most widely used metric is Price/Earnings (or P/E). Well, what makes P/CF stand out is that operating cash flow adds back non-cash charges such as depreciation and amortization to net income, truly reflecting the financial health of a company.
Analysts caution that a company’s earnings are subject to accounting estimates and management manipulation. However, cash flow is reliable. It is net cash flow that reveals how much money a company is actually generating and how effectively management is putting the same to use.
A positive cash flow indicates an increase in the company’s liquid assets. This gives the company the means to settle debt, shell out for its expenses, reinvest in its business, endure downturns and finally pay back its shareholders. Then again, a 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 Strategy?
An investment decision solely based on the P/CF metric may not fetch 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 portrays 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 15 stocks that qualified the screening.
Universal Health Services, one of the nation's largest hospital companies, operating through its subsidiaries, acute care hospitals, behavioral health facilities and ambulatory centers, sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 14.6%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Universal Health Services’ current financial year sales and EPS suggests growth of 9.8% and 42.6%, respectively, from the year-ago period. Universal Health Services has a Value Score of A. Shares of UHS have risen 56% 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 18.8%, on average.
The Zacks Consensus Estimate for General Motors’ current financial year sales and EPS suggests growth of 3.8% and 28.5%, respectively, from the year-ago period. General Motors has a Value Score of A. Shares of GM have risen 11% in the past year.
Unum Group, which provides financial protection benefit solutions, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 3%, on average.
The Zacks Consensus Estimate for Unum Group’s current financial year sales and EPS suggests growth of 4.2% and 8.8%, respectively, from the year-ago period. Unum Group has a Value Score of A. Shares of UNM have gained 6.9% in the past year.
PVH Corp., which operates as an apparel company, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 10.1%, on average.
The Zacks Consensus Estimate for PVH’s current financial year EPS suggests growth of 5.2% from the year-ago period. PVH has a Value Score of A. Shares of PVH have gained 8.8% in the past year.
You can get the rest of the stocks 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 backtest 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 are available at: https://www.zacks.com/performance.