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Estimates for Arrow Electronics call for 9.2% sales growth and 20.2% EPS growth this year.
The U.S. stock market closed higher on Thursday, as improving geopolitical sentiment helped offset pressure from elevated energy prices. The Dow Jones Industrial Average gained 275.88 points, or 0.58%, to finish at 48,185.80. Broader indexes followed suit, with the S&P 500 rising 0.62% to 6,824.66, while the Nasdaq Composite outperformed with a 0.83% increase to close at 22,822.42.
Investor confidence was underpinned by cautious optimism about diplomatic progress in the Middle East, particularly efforts to stabilize the tenuous U.S.-Iran ceasefire. Dialogue signals between Israel and Lebanon contributed to a late-session rebound after earlier weakness, reinforcing expectations of potential de-escalation.
Even as easing geopolitical tensions supported sentiment, investors remained attentive to the monetary policy outlook. Policymakers continued to cite persistent inflationary pressures, amplified by geopolitical risks and energy prices, as grounds for maintaining a hawkish stance.
Against this backdrop, value stocks present an appealing opportunity. When evaluating value stocks, one of the most effective valuation metrics is the Price to Cash Flow (P/CF) ratio. This metric measures the market price of a stock relative to the cash flow the company generates on a per-share basis. A lower P/CF ratio indicates that the stock is trading at a better value, offering strong cash generation potential relative to its price.
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:
Strategic Education, which provides education services, sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 19.9%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Strategic Education’s current financial-year sales and EPS indicates growth of 4.1% and 12.8%, respectively, from the year-ago period. STRA has a Value Score of B.
Arrow Electronics, which sources and engineers technology solutions for leading manufacturers and service providers, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 17.9%, on average.
The Zacks Consensus Estimate for Arrow Electronics’ current financial-year sales and EPS calls for growth of 9.2% and 20.2%, respectively, from the year-ago period. ARW has a Value Score of A.
PG&E Corporation, through its subsidiary Pacific Gas and Electric Company, engages in the sale and delivery of electricity and natural gas. The stock carries a Zacks Rank #2. The company 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 implies growth of 5.7% and 10%, respectively, from the year-ago period. PCG has a Value Score of A.
NatWest Group, the provider of personal and commercial banking and other financial solutions, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 17.9%, on average.
The Zacks Consensus Estimate for NatWest Group’s current financial-year sales and EPS implies growth of 7.4% and 8.9%, respectively, from the year-ago period. NWG has a Value Score of B.
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4 Value Stocks to Buy as Wall Street Weighs Ceasefire Hopes
Key Takeaways
The U.S. stock market closed higher on Thursday, as improving geopolitical sentiment helped offset pressure from elevated energy prices. The Dow Jones Industrial Average gained 275.88 points, or 0.58%, to finish at 48,185.80. Broader indexes followed suit, with the S&P 500 rising 0.62% to 6,824.66, while the Nasdaq Composite outperformed with a 0.83% increase to close at 22,822.42.
Investor confidence was underpinned by cautious optimism about diplomatic progress in the Middle East, particularly efforts to stabilize the tenuous U.S.-Iran ceasefire. Dialogue signals between Israel and Lebanon contributed to a late-session rebound after earlier weakness, reinforcing expectations of potential de-escalation.
Even as easing geopolitical tensions supported sentiment, investors remained attentive to the monetary policy outlook. Policymakers continued to cite persistent inflationary pressures, amplified by geopolitical risks and energy prices, as grounds for maintaining a hawkish stance.
Against this backdrop, value stocks present an appealing opportunity. When evaluating value stocks, one of the most effective valuation metrics is the Price to Cash Flow (P/CF) ratio. This metric measures the market price of a stock relative to the cash flow the company generates on a per-share basis. A lower P/CF ratio indicates that the stock is trading at a better value, offering strong cash generation potential relative to its price.
Companies — Strategic Education, Inc. (STRA - Free Report) , Arrow Electronics, Inc. (ARW - Free Report) , PG&E Corporation (PCG - Free Report) and NatWest Group plc (NWG - Free Report) — boast a low P/CF ratio.
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:
Strategic Education, which provides education services, sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 19.9%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Strategic Education’s current financial-year sales and EPS indicates growth of 4.1% and 12.8%, respectively, from the year-ago period. STRA has a Value Score of B.
Arrow Electronics, which sources and engineers technology solutions for leading manufacturers and service providers, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 17.9%, on average.
The Zacks Consensus Estimate for Arrow Electronics’ current financial-year sales and EPS calls for growth of 9.2% and 20.2%, respectively, from the year-ago period. ARW has a Value Score of A.
PG&E Corporation, through its subsidiary Pacific Gas and Electric Company, engages in the sale and delivery of electricity and natural gas. The stock carries a Zacks Rank #2. The company 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 implies growth of 5.7% and 10%, respectively, from the year-ago period. PCG has a Value Score of A.
NatWest Group, the provider of personal and commercial banking and other financial solutions, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 17.9%, on average.
The Zacks Consensus Estimate for NatWest Group’s current financial-year sales and EPS implies growth of 7.4% and 8.9%, respectively, from the year-ago period. NWG has a Value Score of B.