U.S. equities ended modestly higher yesterday, reversing early-session weakness as sentiment improved throughout the day. Stocks came under pressure early on after concerns that advances in artificial intelligence could disrupt some business models, leading to a pullback in several software stocks. The market stabilized as the session progressed, allowing major benchmarks to recover from their intraday lows. 

By the close, the S&P 500 edged up 0.10% to 6,843.22, while the Nasdaq Composite advanced 0.14% to 22,578.38. The Dow Jones Industrial Average posted a 0.07% gain, ending at 49,533.19.

Even though the major indexes only moved slightly, the market action hints at a quiet shift in investor focus, one that could favor value stocks. Often trading below their intrinsic value, these stocks offer a safety margin.

When evaluating value stocks, one of the most effective valuation metrics is the Price to Cash Flow (P/CF) ratio. Companies like Harmony Biosciences Holdings, Inc. (HRMY Quick QuoteHRMY - Free Report) , Tripadvisor, Inc. (TRIP Quick QuoteTRIP - Free Report) , The AES Corporation (AES Quick QuoteAES - Free Report) and Concentrix Corporation (CNXC Quick QuoteCNXC - 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 out of the 12 value stocks that qualified the screening:

Harmony Biosciences, a pharmaceutical company, sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 7.2%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Harmony Biosciences’ current financial-year sales and EPS indicates growth of 21.4% and 25.9%, respectively, from the year-ago period. HRMY has a Value Score of A. Shares of HRMY have risen 4.6% in the past year.

Tripadvisor, an online travel company engaged in the provision of travel guidance products and services worldwide, sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 32.1%, on average. 

The Zacks Consensus Estimate for Tripadvisor’s current financial-year sales and EPS calls for growth of 2.6% and 44.1%, respectively, from the year-ago period. TRIP has a Value Score of A. Shares of TRIP have fallen 40.4% in the past year.

The AES Corporation, a global energy company, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 14.7%, on average. 

The Zacks Consensus Estimate for AES Corporation’s current financial-year sales and EPS implies growth of 3% and 0.9%, respectively, from the year-ago period. AES has a Value Score of A. Shares of AES have advanced 57.6% in the past year.

Concentrix Corporation, a global technology and services leader providing customer experience solutions, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 1%, on average. 

The Zacks Consensus Estimate for Concentrix Corporation’s current financial-year sales and EPS suggests growth of 2.9% and 4.8%, respectively, from the year-ago period. CNXC has a Value Score of A. Shares of CNXC have declined 33.5% 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 create your own strategies and back test them first before taking the investment plunge.