Sometimes, it can be difficult to value certain stocks based on earnings alone. The earnings and EPS of stocks that are investing heavily in growing their business, for example, might not reflect the true profitability of the company's business. These companies may be left with deceptively high PE ratios that can discourage investors.
One alternative valuation metric that can sometimes shed a better light on the valuation of a business is price-to-free-cash-flow ratio, or P/FCF.
Unlike EPS, free cash flow is a measure of the cash a company generates after subtracting out what it needs to support its operations and maintain its assets. Free cash flow does not include factors such as non-cash expenses, but it does include spending on equipment and other assets. It also includes changes in working capital.
Some investors see free cash flow as a more accurate measure of a business given that it is more difficult to manipulate under GAAP standards. In addition, any company that is not generating cash flow is on an unsustainable path, at least in the near-term.
Cheap Cash Flow Stocks
Here are the 12 stocks with the lowest P/FCF in the S&P 500 today, according to Finviz:
- Prudential Financial Inc (NYSE: PRU), 1.67.
- Fox Corp Class A (NASDAQ: FOXA), 2.24.
- Morgan Stanley (NYSE: MS), 2.32.
- Synchrony Financial (NYSE: SYF), 2.61.
- Navient Corp (NASDAQ: NAVI), 2.73.
- Principal Financial Group Inc (NASDAQ: PFG), 2.83.
- Capital One Financial Corp. (NYSE: COF), 2.86.
- Alliance Data Systems Corporation (NYSE: ADS), 2.88.
- Cimarex Energy Co (NYSE: XEC), 3.17.
- Apache Corporation (NYSE: APA), 3.23.
- United Rentals, Inc. (NYSE: URI), 3.86.
- State Street Corp (NYSE: STT), 4.14.
Unfortunately, as is the case with many stocks with extremely low PE ratios, certain stocks with low P/FCFs are being shunned by the market for a reason. Screening for stocks with low P/FCFs maybe a good starting point in choosing value stocks to buy, but investors should definitely take a deeper dive if P/FCF looks too good to be true.
Do you agree with this take? Email email@example.com with your thoughts.
14 Lowest PEG Ratios In The S&P 500
13 Stocks With Short Squeeze Potential
See more from Benzinga
- Shock The System: What To Know About WWE, AEW And The Biggest Week For Pro Wrestling In Years
- Wells Fargo Initiates On Media Stocks, Disney Among Top Picks
- Large Morgan Stanley Option Traders Make Bullish Bets Following Fed Commentary
© 2019 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.