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4 Low P/CF Stocks to Buy Now as Market Confidence Soars
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All three major U.S. stock indexes ended the week of Aug 16 on a positive note. The S&P 500 and the tech-heavy Nasdaq Composite posted modest gains on Friday, advancing 0.2% and 0.21% respectively, while the Dow Jones Industrial Average rose by 96.7 points, or 0.24%. This uptick follows a period of heightened volatility as investor sentiment has improved in response to favorable economic data.
July's retail sales figure surpassed market expectations, highlighting strong consumer spending activity. Simultaneously, a notable drop in unemployment claims, with jobless claims falling by 7,000 to 227,000 for the week ending Aug 10, has bolstered confidence in the labor market. Additionally, softer-than-expected inflation data has fueled hopes for a more manageable inflationary environment.
These economic indicators have collectively restored market confidence and mitigated fears of a downturn. As a result, analysts are reevaluating their forecasts for Federal Reserve actions, with many now anticipating a more measured approach from the central bank.
In this context, value stocks present a compelling investment opportunity. These stocks offer a margin of safety that growth stocks might lack. In value investing, investors pick stocks that are cheap but fundamentally sound. There are several ratios to identify value stocks but none alone can conclusively determine their inherent potential. Each ratio helps an investor understand a particular aspect of the company’s business.
One such ratio, Price to Cash Flow (or P/CF), can work wonders in stock picking if used prudently. 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) , EnerSys (ENS - Free Report) and Itron, Inc. (ITRI - Free Report) boast a low P/CF ratio.
Why P/CF Ratio?
You must be wondering why we are considering this when the most widely used valuation metric is Price/Earnings (or P/E). Well, 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.
A 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.
However, 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 take into account 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 chances of falling into a value trap.
The Bargain Hunting Strategy
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 17 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 51%, respectively, from the year-ago period. Universal Health Services has a Value Score of A. Shares of UHS have risen 76.5% 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 18.8%, on average.
The Zacks Consensus Estimate for General Motors’ current financial year sales and EPS suggests growth of 4.2% and 29.4%, respectively, from the year-ago period. General Motors has a Value Score of A. Shares of GM have risen 36.2% 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 1.5%, on average.
The Zacks Consensus Estimate for EnerSys’ current financial year sales and EPS suggests growth of 4.9% and 7.4%, respectively, from the year-ago period. ENS has a Value Score of A. Shares of ENS have lost 4.4% in the past year.
Itron is a technology, solutions, and service company that provides end-to-end solutions to help manage energy, water and smart city operations. This Zacks Rank #2 company has a trailing four-quarter earnings surprise of 57%, on average.
The Zacks Consensus Estimate for Itron’s current financial year sales and EPS suggests growth of 10.8% and 33.3%, respectively, from the year-ago period. Itron has a Value Score of B. The stock has rallied 44.9% 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 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.
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4 Low P/CF Stocks to Buy Now as Market Confidence Soars
All three major U.S. stock indexes ended the week of Aug 16 on a positive note. The S&P 500 and the tech-heavy Nasdaq Composite posted modest gains on Friday, advancing 0.2% and 0.21% respectively, while the Dow Jones Industrial Average rose by 96.7 points, or 0.24%. This uptick follows a period of heightened volatility as investor sentiment has improved in response to favorable economic data.
July's retail sales figure surpassed market expectations, highlighting strong consumer spending activity. Simultaneously, a notable drop in unemployment claims, with jobless claims falling by 7,000 to 227,000 for the week ending Aug 10, has bolstered confidence in the labor market. Additionally, softer-than-expected inflation data has fueled hopes for a more manageable inflationary environment.
These economic indicators have collectively restored market confidence and mitigated fears of a downturn. As a result, analysts are reevaluating their forecasts for Federal Reserve actions, with many now anticipating a more measured approach from the central bank.
In this context, value stocks present a compelling investment opportunity. These stocks offer a margin of safety that growth stocks might lack. In value investing, investors pick stocks that are cheap but fundamentally sound. There are several ratios to identify value stocks but none alone can conclusively determine their inherent potential. Each ratio helps an investor understand a particular aspect of the company’s business.
One such ratio, Price to Cash Flow (or P/CF), can work wonders in stock picking if used prudently. 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) , EnerSys (ENS - Free Report) and Itron, Inc. (ITRI - Free Report) boast a low P/CF ratio.
Why P/CF Ratio?
You must be wondering why we are considering this when the most widely used valuation metric is Price/Earnings (or P/E). Well, 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.
A 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.
However, 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 take into account 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 chances of falling into a value trap.
The Bargain Hunting Strategy
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 17 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 51%, respectively, from the year-ago period. Universal Health Services has a Value Score of A. Shares of UHS have risen 76.5% 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 18.8%, on average.
The Zacks Consensus Estimate for General Motors’ current financial year sales and EPS suggests growth of 4.2% and 29.4%, respectively, from the year-ago period. General Motors has a Value Score of A. Shares of GM have risen 36.2% 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 1.5%, on average.
The Zacks Consensus Estimate for EnerSys’ current financial year sales and EPS suggests growth of 4.9% and 7.4%, respectively, from the year-ago period. ENS has a Value Score of A. Shares of ENS have lost 4.4% in the past year.
Itron is a technology, solutions, and service company that provides end-to-end solutions to help manage energy, water and smart city operations. This Zacks Rank #2 company has a trailing four-quarter earnings surprise of 57%, on average.
The Zacks Consensus Estimate for Itron’s current financial year sales and EPS suggests growth of 10.8% and 33.3%, respectively, from the year-ago period. Itron has a Value Score of B. The stock has rallied 44.9% 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 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.