Add Value to Your Investment With These 4 Low P/CF Stocks
The Federal Reserve has been successful in its attempt to tame inflation, as the Consumer Price Index fell 0.1% sequentially in the month of December. With inflation steadily easing, Fed Chairman Jerome Powell might further lower the magnitude of the rate hike. Economists are eyeing a quarter basis point increase in the benchmark interest rate.
Despite cooling inflation, market pundits continue to see headwinds in the form of softness in consumer spending. Also, geopolitical turbulence as well as higher borrowing costs might just push the economy into a likely recession.
So, the question is how to refine the portfolio to endure any unprecedented circumstances. Well, apply a holistic approach. Look for stocks that are fundamentally sound and offer security as well as resilience with long-term upside potential.
Here's an Investing Tip
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 as 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. Signet Jewelers Limited SIG, NRG Energy, Inc. NRG, ACCO Brands Corporation ACCO and Sterling Infrastructure, Inc. STRL 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 eight stocks that qualified the screening:
Signet, the world's largest retailer of diamond jewelry, sports a Zacks Rank #1. It has an expected EPS growth rate of 8% for three-five years. You can see the complete list of today’s Zacks #1 Rank stocks here.
Signet has a trailing four-quarter earnings surprise of 44.8%, on average. SIG has a Value Score of B. The stock has declined 11.9% in the past year.
NRG Energy operates as an integrated power company in the United States. This Zacks Rank #1 company has an expected EPS growth rate of 12.1% for three-five years. NRG Energy has a Value Score of A.
The Zacks Consensus Estimate for NRG Energy’s current financial year sales and EPS suggests growth of 19.9% and 45.9%, respectively, from the year-ago period. Shares of NRG have declined 13.4% in the past year.
ACCO Brands, which designs, manufactures, and markets consumer and end-user products, carries a Zacks Rank #2. The company has an expected EPS growth rate of 12% for three-five years.
ACCO Brands has a Value Score of A. The company has a trailing four-quarter earnings surprise of 6.2%, on average. Shares of ACCO Brands have fallen 24.6% in the past year.
Sterling Infrastructure, which is engaged in transportation, e-infrastructure, and building solutions, carries a Zacks Rank #2. It has an expected EPS growth rate of 18% for three-five years. The company has a trailing four-quarter earnings surprise of 20%, on average.
The Zacks Consensus Estimate for Sterling Infrastructure’s current financial-year sales and EPS suggests growth of 21.2% and 46.1%, respectively, from the year-ago period. Sterling Infrastructure has a Value Score of A. The stock has jumped 30% 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.
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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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NRG Energy, Inc. (NRG) : Free Stock Analysis Report
Signet Jewelers Limited (SIG) : Free Stock Analysis Report
Acco Brands Corporation (ACCO) : Free Stock Analysis Report
Sterling Infrastructure, Inc. (STRL) : Free Stock Analysis Report
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