We always try to hit the jackpot while picking stocks. However, it’s not easy to strike the right chord every time, unless you’re blessed with the Midas touch. When it comes to the investment market, experts believe that the value style is one of the most effective approaches. Value investing is essentially about picking stocks that have good things going for them, even when external factors have beaten them to it.
There are various valuation metrics to determine the inherent strength of a stock, but picking ratios at random cannot serve your purpose if you want a realistic assessment of a company’s financial health. For this, we recommend price to cash flow (or P/CF) as one of the key metrics. This metric evaluates a stock’s market price relative to the amount of cash flow it generates on a per-share basis—the lower the number, the better. PVH Corp. (PVH – Free report), Centene Corporation (CPU – Free report), Solo Brands, Inc. (DTC – Free report) and Park Hotels & Resorts Inc. (PK – Free report) boast a low P/CF ratio.
Cost to cash flow reveals financial health
Questions may arise as to why we are considering the price-to-cash flow metric when the most widely used metric is price/earnings (or P/E). Well, what sets P/CF apart is that operating cash flow adds back non-cash charges like depreciation and amortization to net income, which truly reflects the company’s financial health.
Analysts warn that the company’s earnings are subject to accounting estimates and management manipulation. However, cash flow is reliable. Net cash flow reveals how much cash a company actually generates and how effectively management uses it.
Positive cash flow indicates an increase in the company’s liquid assets. This provides it with funds to settle debts, pay expenses, reinvest in the business, weather downturns and finally pay back shareholders. On the other hand, negative cash flow implies a drop in liquidity, which reduces its flexibility to support these movements.
What is the best strategy?
An investment decision based solely on the P/CF ratio may not produce the desired results. To identify stocks that are trading at a discount, you should broaden your search criteria and also consider price-to-book, price-to-earnings, and price-to-sales ratios. Adding a favorable Zacks Rank and an A or B Value Score to your search criteria should yield even better results because they eliminate the chance of falling into a value trap.
Here are the parameters for choosing real value stocks:
P/CF less than or equal to X-industry median.
Price greater than or equal to 5: All shares must trade at a minimum of $5 or more.
Average 20-day volume over 100,000: The significant trading volume ensures that the shares are easily tradable.
P/E using (F1) less than or equal to X-Industry Median: This parameter includes stocks that are trading at a discount or similar to their peers.
P/B is less than or equal to X-Industry Median: A lower P/B compared to the industry average means there is plenty of room for the stock to gain.
P/S less than or equal to X-Industry Median: The P/S ratio determines how the share price compares to the company’s sales – the lower the ratio, the more attractive the stock.
PEG less than 1: The ratio is used to determine the value of the stock, taking into account the company’s profit growth. The PEG ratio presents a more complete picture than the P/E ratio. A value less than 1 indicates that the stock is undervalued and that investors should pay less for a stock that has solid earnings growth prospects.
Zacks Rank Less Than or Equal to 2: Stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) are known to outperform regardless of the market environment.
A value score less than or equal to B: Our research shows that stocks with a style rating of A or B, when combined with a Zacks Rank #1 or 2, offer the best upside potential.
Here are four of the seven stocks that qualified for the screening.
PVH Corp., operating as an apparel company, carries a Zacks Rank #2. The company has an earnings surprise over the last four quarters of an average of 18.9%. You can see the full list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for PVH’s current fiscal year sales and EPS suggests growth of 3.5% and 16.4%, respectively, from year-ago levels. PVH has a value rating of A. PVH shares have gained 39.9% over the past year.
Hundreds, a leading healthcare company, carries a Zacks Rank #2. The company has surprising earnings for the last four quarters averaging 5.6%.
The Zacks Consensus Estimate for Centene’s current fiscal year sales and EPS suggests growth of 4.4% and 15.2%, respectively, from year-ago levels. Centene has a value rating of A. Shares of Centene are down 13.3% over the past year.
Private brands, operating as a direct-to-consumer platform that offers branded outdoor and lifestyle products, carries a Zacks Rank #2. The company has an earnings surprise over the last four quarters of an average of 112.1%.
The Zacks Consensus Estimate for Solo Brands’ current fiscal year sales suggests growth of 2.8% from the prior period’s levels. Solo Brands has a value rating of A. The stock has risen 22.6% over the past year.
Park hotels and resorts, one of the largest publicly traded lodging REITs, carries a Zacks Rank #2. The company has an earnings surprise over the last four quarters of an average of 12.3%.
The Zacks Consensus Estimate for Park Hotels & Resorts’ current fiscal year sales and EPS suggests growth of 7.7% and 28.6%, respectively, from the prior period’s figure. PK has a value rating of A. The stock is up 24.2% over the past year.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial of the Research Advisor and start using this screen in your trading. Moreover, you can also create your own strategies and test them first before taking the investment leap.
The Research Advisor is a great place to start. It is easy to use. Everything is in understandable language. And it’s very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open the research wizard, plug in your findings and see what gems come out.
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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 the options 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 the options mentioned in this material.
Disclosure: Information on the performance of Zacks portfolios and strategies is available at: https://www.zacks.com/performance.
Zacks Names ‘Top Pick for Double’
Out of thousands of stocks, each of 5 Zacks experts picked their favorite to skyrocket +100% or more in the coming months. Of these 5, Research Director Sheraz Mian handpicks one that has the most explosive upside of all.
He has been credited with a “landmark medical breakthrough” and is developing a vibrant array of other projects that could change the world for patients suffering from diseases affecting the liver, lungs and blood. This is a timely investment that you can catch as it comes out of the bottom of a bear market.
It could rival or outperform other recent stocks slated to double, such as Boston Beer Company, which shot up +143.0% in just over 9 months, and NVIDIA, which boomed +175.9% in one year.
Free: See our top stocks and 4 runners-up
