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4 Value Picks to Ride the Market Rebound After US-China Trade Thaw
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Wall Street saw a strong rally on Monday, driven by renewed optimism over U.S.-China trade relations. A 90-day agreement between the two nations to reduce tariffs has rekindled hopes of easing global trade tensions. The United States will lower duties on Chinese imports from a steep 145% to 30%, while China has agreed to cut its retaliatory tariffs on American goods from 125% to 10%, signaling a shift from confrontation to cooperation.
Markets responded positively, with the S&P 500 jumping 3.3% to settle at 5,844.19, while the Nasdaq Composite posted a stronger performance, climbing 4.4% to close at 18,708.34. The Dow Jones Industrial Average gained 2.8% to finish at 42,410.10.
With markets bouncing back and sentiment improving, now may be an opportune moment to shift focus toward value stocks. As trade fears cool, companies with strong fundamentals but beaten-down prices could outperform.
When evaluating value stocks, one of the most effective valuation metrics is the Price to Cash Flow (P/CF) ratio. Companies like StoneCo Ltd. (STNE - Free Report) , Centene Corporation (CNC - Free Report) , CVS Health Corporation (CVS - Free Report) and Pfizer Inc. (PFE - Free Report) boast a low P/CF ratio. The P/CF ratio 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.
Price to Cash Flow Reflects Financial Health
Value investing is considered one of the best practices when it comes to picking stocks. It is essentially about selecting stocks that are fundamentally sound but have been beaten down by some external factors. Such stocks are poised to bounce back as and when investors recognize the inherent value of companies. Certainly, the value investment strategy best suits investors with a long-term horizon.
There are different valuation metrics to determine a stock’s inherent strength. Still, a random selection of a ratio cannot serve your purpose if you want a realistic assessment of a company’s financial position. For this, the Price to Cash Flow (or P/CF) ratio is one of the key metrics.
Price-to-Cash-Flow 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. 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 a company's financial health.
Analysts caution that a company’s earnings are subject to accounting estimates and management manipulation. However, cash flow is reliable. Net cash flow unveils how much money a company is actually generating and how effectively management is deploying the same.
Positive cash flow indicates an increase in a company’s liquid assets. It gives the company the means to settle debt, meet its expenses, reinvest in its business, endure downturns and finally pay back its shareholders. 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 Value Investing Strategy?
An investment decision based solely on the P/CF metric may not yield 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 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 Zacks Rank #1 or 2, offer the best upside potential.
Here are four of the 16 value stocks that qualified the screening:
Stone, a leading provider of financial technology and software solutions, sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 6.4%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Stone’s current financial year sales and earnings per share (EPS) suggests growth of 9.8% and 2.2%, respectively, from the year-ago period. STNE has a Value Score of B. Shares of STNE have fallen 12.3% in the past year.
Centene, a leading healthcare enterprise, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 25.5%, on average. (See the Zacks Earnings Calendar to stay ahead of market-making news.)
The Zacks Consensus Estimate for Centene’s current financial year sales and EPS implies growth of 10.3% and 1.4%, respectively, from the year-ago period. Centene has a Value Score of A. Shares of Centene have declined 18.2% in the past year.
CVS Health, a leading health solutions company, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 18.1%, on average.
The Zacks Consensus Estimate for CVS Health’s current financial year sales and EPS suggests growth of 3.6% and 11.8%, respectively, from the year-ago period. CVS Health has a Value Score of A. Shares of CVS have jumped 15.7% in the past year.
Pfizer, which develops, manufactures, markets, distributes and sells biopharmaceutical products, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 43.5%, on average.
The Zacks Consensus Estimate for Pfizer’s current financial year sales and EPS suggests a decline of 0.7% and 1%, respectively, from the year-ago period. Pfizer has a Value Score of A. Shares of PFE have fallen 18.6% 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.
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.
Image: Bigstock
4 Value Picks to Ride the Market Rebound After US-China Trade Thaw
Wall Street saw a strong rally on Monday, driven by renewed optimism over U.S.-China trade relations. A 90-day agreement between the two nations to reduce tariffs has rekindled hopes of easing global trade tensions. The United States will lower duties on Chinese imports from a steep 145% to 30%, while China has agreed to cut its retaliatory tariffs on American goods from 125% to 10%, signaling a shift from confrontation to cooperation.
Markets responded positively, with the S&P 500 jumping 3.3% to settle at 5,844.19, while the Nasdaq Composite posted a stronger performance, climbing 4.4% to close at 18,708.34. The Dow Jones Industrial Average gained 2.8% to finish at 42,410.10.
With markets bouncing back and sentiment improving, now may be an opportune moment to shift focus toward value stocks. As trade fears cool, companies with strong fundamentals but beaten-down prices could outperform.
When evaluating value stocks, one of the most effective valuation metrics is the Price to Cash Flow (P/CF) ratio. Companies like StoneCo Ltd. (STNE - Free Report) , Centene Corporation (CNC - Free Report) , CVS Health Corporation (CVS - Free Report) and Pfizer Inc. (PFE - Free Report) boast a low P/CF ratio. The P/CF ratio 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.
Price to Cash Flow Reflects Financial Health
Value investing is considered one of the best practices when it comes to picking stocks. It is essentially about selecting stocks that are fundamentally sound but have been beaten down by some external factors. Such stocks are poised to bounce back as and when investors recognize the inherent value of companies. Certainly, the value investment strategy best suits investors with a long-term horizon.
There are different valuation metrics to determine a stock’s inherent strength. Still, a random selection of a ratio cannot serve your purpose if you want a realistic assessment of a company’s financial position. For this, the Price to Cash Flow (or P/CF) ratio is one of the key metrics.
Price-to-Cash-Flow 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. 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 a company's financial health.
Analysts caution that a company’s earnings are subject to accounting estimates and management manipulation. However, cash flow is reliable. Net cash flow unveils how much money a company is actually generating and how effectively management is deploying the same.
Positive cash flow indicates an increase in a company’s liquid assets. It gives the company the means to settle debt, meet its expenses, reinvest in its business, endure downturns and finally pay back its shareholders. 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 Value Investing Strategy?
An investment decision based solely on the P/CF metric may not yield 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 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 Zacks Rank #1 or 2, offer the best upside potential.
Here are four of the 16 value stocks that qualified the screening:
Stone, a leading provider of financial technology and software solutions, sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 6.4%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Stone’s current financial year sales and earnings per share (EPS) suggests growth of 9.8% and 2.2%, respectively, from the year-ago period. STNE has a Value Score of B. Shares of STNE have fallen 12.3% in the past year.
Centene, a leading healthcare enterprise, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 25.5%, on average. (See the Zacks Earnings Calendar to stay ahead of market-making news.)
The Zacks Consensus Estimate for Centene’s current financial year sales and EPS implies growth of 10.3% and 1.4%, respectively, from the year-ago period. Centene has a Value Score of A. Shares of Centene have declined 18.2% in the past year.
CVS Health, a leading health solutions company, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 18.1%, on average.
The Zacks Consensus Estimate for CVS Health’s current financial year sales and EPS suggests growth of 3.6% and 11.8%, respectively, from the year-ago period. CVS Health has a Value Score of A. Shares of CVS have jumped 15.7% in the past year.
Pfizer, which develops, manufactures, markets, distributes and sells biopharmaceutical products, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 43.5%, on average.
The Zacks Consensus Estimate for Pfizer’s current financial year sales and EPS suggests a decline of 0.7% and 1%, respectively, from the year-ago period. Pfizer has a Value Score of A. Shares of PFE have fallen 18.6% 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.
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.