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4 Value Stocks to Watch Amid US-China Trade Optimism
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Key Takeaways
U.S. markets hit record highs on renewed trade optimism and Fed rate-cut expectations.
STNE, ITRI, PCG, and PAGS stand out with low Price to Cash Flow ratios and solid Value Scores.
Each company shows notable sales and earnings growth, highlighting their value appeal.
The U.S. stock market climbed to record highs as optimism surrounding trade discussions between Washington and Beijing reignited investor confidence. The Dow Jones Industrial Average advanced 337.47 points, or 0.71%, to close at 47,544.59, while the S&P 500 gained 1.23% to reach 6,875.16. The Nasdaq Composite index jumped 1.86% to 23,637.46. The U.S. dollar eased slightly as investors shifted toward equities, betting on a more favorable macroeconomic environment.
The momentum witnessed also arose from expectations about central bank policies and major corporate earnings reports. There is a strong anticipation of a rate cut decision at the Federal Reserve’s two-day policy meeting, especially after September’s soft consumer price index. However, the ongoing U.S. government shutdown has made the Fed’s assessment more difficult.
Adding to the market’s intrigue, investors are turning their attention to the earnings season with major companies set to report this week. These results are expected to provide fresh insights into corporate profitability amid evolving global trade conditions and monetary policy shifts. Given the market’s record highs and heightened volatility surrounding policy and trade developments, investors may find greater stability in value stocks. Often trading below their intrinsic value, these stocks offer a safety margin that is especially appealing during periods of market uncertainty.
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) , Itron, Inc. (ITRI - Free Report) , PG&E Corporation (PCG - Free Report) and PagSeguro Digital Ltd. (PAGS - 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
You must be wondering why we consider the P/CF valuation metric when the most widely used valuation metric is Price/Earnings (or P/E). An important factor 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. Then again, cash flow is quite reliable. Net cash flow unveils how much money a company generates and how effectively management is deploying the same.
Positive cash flow indicates an increase in the company’s liquid assets. This gives the company the means to settle debt, meet its expenses, reinvest in the 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.
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 a Zacks Rank #1 or 2 offer the best upside potential.
Here are four of the 14 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 11.5%, 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 EPS indicates growth of 14.3% and 24.4%, respectively, from the year-ago period. STNE has a Value Score of B. Shares of STNE have advanced 68.4% in the past year.
Itron, a technology and services company offering end-to-end solutions for managing energy, water and smart city operations, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 32.5%, on average.
The Zacks Consensus Estimate for Itron’s current financial-year EPS implies growth of 8% from the year-ago period. ITRI has a Value Score of B. Shares of ITRI have gained 30.4% in the past year.
PG&E Corporation, through its subsidiary, Pacific Gas and Electric Company, engages in the sale and delivery of electricity and natural gas. The stock, which carries a Zacks Rank #2, has a trailing four-quarter earnings surprise of 0.5%, on average.
The Zacks Consensus Estimate for PG&E Corporation’s current financial-year sales and EPS calls for growth of 6.7% and 10.3%, respectively, from the year-ago period. PCG has a Value Score of A. Shares of PCG have declined 18.4% in the past year.
PagSeguro Digital, a leading digital bank offering a comprehensive suite of financial services and payment solutions, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 10.1%, on average.
The Zacks Consensus Estimate for PagSeguro Digital’s current financial-year sales and EPS suggests growth of 5.5% and 14.9%, respectively, from the year-ago period. PagSeguro Digital has a Value Score of A. Shares of PAGS have jumped 19.4% in the past year.
You can get the rest of the stock 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 back test 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 Stocks to Watch Amid US-China Trade Optimism
Key Takeaways
The U.S. stock market climbed to record highs as optimism surrounding trade discussions between Washington and Beijing reignited investor confidence. The Dow Jones Industrial Average advanced 337.47 points, or 0.71%, to close at 47,544.59, while the S&P 500 gained 1.23% to reach 6,875.16. The Nasdaq Composite index jumped 1.86% to 23,637.46. The U.S. dollar eased slightly as investors shifted toward equities, betting on a more favorable macroeconomic environment.
The momentum witnessed also arose from expectations about central bank policies and major corporate earnings reports. There is a strong anticipation of a rate cut decision at the Federal Reserve’s two-day policy meeting, especially after September’s soft consumer price index. However, the ongoing U.S. government shutdown has made the Fed’s assessment more difficult.
Adding to the market’s intrigue, investors are turning their attention to the earnings season with major companies set to report this week. These results are expected to provide fresh insights into corporate profitability amid evolving global trade conditions and monetary policy shifts. Given the market’s record highs and heightened volatility surrounding policy and trade developments, investors may find greater stability in value stocks. Often trading below their intrinsic value, these stocks offer a safety margin that is especially appealing during periods of market uncertainty.
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) , Itron, Inc. (ITRI - Free Report) , PG&E Corporation (PCG - Free Report) and PagSeguro Digital Ltd. (PAGS - 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
You must be wondering why we consider the P/CF valuation metric when the most widely used valuation metric is Price/Earnings (or P/E). An important factor 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. Then again, cash flow is quite reliable. Net cash flow unveils how much money a company generates and how effectively management is deploying the same.
Positive cash flow indicates an increase in the company’s liquid assets. This gives the company the means to settle debt, meet its expenses, reinvest in the 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.
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 a Zacks Rank #1 or 2 offer the best upside potential.
Here are four of the 14 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 11.5%, 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 EPS indicates growth of 14.3% and 24.4%, respectively, from the year-ago period. STNE has a Value Score of B. Shares of STNE have advanced 68.4% in the past year.
Itron, a technology and services company offering end-to-end solutions for managing energy, water and smart city operations, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 32.5%, on average.
The Zacks Consensus Estimate for Itron’s current financial-year EPS implies growth of 8% from the year-ago period. ITRI has a Value Score of B. Shares of ITRI have gained 30.4% in the past year.
PG&E Corporation, through its subsidiary, Pacific Gas and Electric Company, engages in the sale and delivery of electricity and natural gas. The stock, which carries a Zacks Rank #2, has a trailing four-quarter earnings surprise of 0.5%, on average.
The Zacks Consensus Estimate for PG&E Corporation’s current financial-year sales and EPS calls for growth of 6.7% and 10.3%, respectively, from the year-ago period. PCG has a Value Score of A. Shares of PCG have declined 18.4% in the past year.
PagSeguro Digital, a leading digital bank offering a comprehensive suite of financial services and payment solutions, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 10.1%, on average.
The Zacks Consensus Estimate for PagSeguro Digital’s current financial-year sales and EPS suggests growth of 5.5% and 14.9%, respectively, from the year-ago period. PagSeguro Digital has a Value Score of A. Shares of PAGS have jumped 19.4% in the past year.
You can get the rest of the stock 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 back test 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 is available at: https://www.zacks.com/performance.