For Immediate Release
Chicago, IL – September 2, 2020 – Stocks in this week’s article are Graphic Packaging Holding Company (GPK - Free Report) , Celestica Inc. (CLS - Free Report) , Owens & Minor, Inc. (OMI - Free Report) and JELD-WEN Holding, Inc. (JELD - Free Report) .
The economy has had a roller-coaster ride so far this year. Starting on an upbeat note, the year took a nasty turn with the novel coronavirus bringing the economy to a standstill. Without doubt, this outbreak has severely impacted industries across the board, taking a toll on employment and household income.
Nonetheless, measures undertaken to support households, firms and financial markets coupled with the resumption of commercial and industrial activities post the coronavirus lockdown have provided much needed impetus.
Well we still don’t know how long this battle with COVID-19 will be. Now the big question is what strategy investors should apply.
Here's an All-Weather Strategy
Investment in stocks made on diligent value analysis is usually considered one of the best practices. In value investing, investors pick stocks that are cheap but fundamentally sound. There are a number of ratios to identify value stocks but none alone can conclusively determine their inherent potential.
Each ratio helps an investor to 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.
You must be wondering why we are considering this when the most widely used valuation metric is Price/Earnings (or P/E). Well, 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 the financial health of a company.
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 is actually generating 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, shell out for its expenses, reinvest in its 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 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.
For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/1050915/4-low-pricetocashflow-stocks-to-buy-for-optimum-returns
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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