With the economy gradually gathering steam, quite a few market pundits are placing their bets on value stocks. 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 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. Value Score 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 its 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. PEG ratio gives a more complete picture than 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 prospect. 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 five of the 20 stocks that qualified the screening: Vale S.A. ( VALE Quick Quote VALE - Free Report) , which produces and sells iron ore and iron ore pellets for use as raw materials in steelmaking, has a Zacks Rank #1 and an expected EPS growth rate of 30.7% for three-five years. The company has a trailing four-quarter earnings surprise of 14.3%, on average. You can see . the complete list of today’s Zacks #1 Rank stocks here Atlas Corp. ( ATCO Quick Quote ATCO - Free Report) , a leading global asset management company, carries a Zacks Rank #2. It has an expected EPS growth rate of 14.5% for three-five years. The company has a trailing four-quarter earnings surprise of 7.2%, on average. Affiliated Managers Group, Inc. ( AMG Quick Quote AMG - Free Report) , an asset management company providing investment management services to mutual funds, institutional clients, and high net worth individuals, carries a Zacks Rank #2. It has an expected EPS growth rate of 15% for three-five years. The company has a trailing four-quarter earnings surprise of 8.4%, on average. Celestica Inc. ( CLS Quick Quote CLS - Free Report) , which provides hardware platform and supply chain solutions, has an expected EPS growth rate of 10.2% for three-five years. This Zacks Rank #2 company has a trailing four-quarter earnings surprise of 15.5%, on average. Blucora, Inc. ( BCOR Quick Quote BCOR - Free Report) , which provides technology-enabled financial solutions, has a Zacks Rank #2 and an expected EPS growth rate of 15% for three-five years. The company has a trailing four-quarter earnings surprise of 27.5%, on average. Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and backtesting software. 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