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The Russia and Ukraine conflict, supply chain bottlenecks and soaring inflation have taken the sheen out of the stock market. Rising crude prices have also been making things tough. The Federal Reserve’s greatest challenge now is to rein in soaring inflation, and it is treading the path of steady rate hike to tame the same.
Evidently, the Federal Reserve’s hawkish stance calls for a prudent investment strategy. So, as investors rebalance their portfolios, market pundits are placing their bets on value stocks. Investment in stocks made on diligent value analysis is usually considered one of the best practices. In value investing, investors pick stocks that are cheap but fundamentally sound. There are a number of ratios to identify value stocks but none alone can conclusively determine their inherent potential.
Each ratio helps an investor understand a particular aspect of the company’s business. One such ratio, Price to Cash Flow (or P/CF), can work wonders in stock picking if used prudently. This 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. Vishay Intertechnology, Inc. VSH, Celestica Inc. CLS, ASGN Incorporated ASGN and Patrick Industries, Inc. PATK boast a low P/CF ratio.
Why P/CF Ratio?
You must be wondering why we are considering this when the most widely used valuation metric is Price/Earnings (or P/E). Well, one of the important factors that make 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.
A 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.
However, an investment decision solely based on the P/CF metric may not fetch the desired results. To identify stocks that are trading at a discount, you should expand your search criteria and take into account 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 chances of falling into a value trap.
The Bargain Hunting Strategy
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 its 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 prospect.
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 15 stocks that qualified the screening:
Vishay Intertechnology, which manufactures and supplies discrete semiconductors and passive electronic components, carries a Zacks Rank #2 and has an expected EPS growth rate of 22.7% for three-five years. The company has a trailing four-quarter earnings surprise of 5%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for VSH’s current financial year sales and EPS suggests growth of 6.8% and 15.5%, respectively, from the year-ago period. Vishay Intertechnology has a Value Score of A. Shares of VSH have declined 16.2% in the past year.
Celestica, a leader in design, manufacturing and supply-chain solutions for the world's most innovative companies, carries a Zacks Rank #2. It has an expected EPS growth rate of 15.4% for three-five years. The company has a trailing four-quarter earnings surprise of 12.6%, on average.
The Zacks Consensus Estimate for Celestica's current financial-year sales and EPS suggests growth of 16.5% and 29.2%, respectively, from the year-ago period. CLS has a Value Score of A. The stock has zoomed 33.1% in the past year.
ASGN Incorporated, a leading provider of IT services and solutions, including technology and creative digital marketing, carries a Zacks Rank #2. It has an expected EPS growth rate of 15.5% for three-five years. ASGN Incorporated has a trailing four-quarter earnings surprise of 10.2%, on average.
The Zacks Consensus Estimate for ASGN’s current financial year sales and EPS suggests growth of 9.1% and 20.8%, respectively, from the year-ago period. ASGN has a Value Score of B. The stock has declined 11.8% in the past year.
Patrick Industries, a leading component solutions provider for the RV, marine, manufactured housing and various industrial markets, carries a Zacks Rank #2 and has an expected EPS growth rate of 6.3% for three-five years. Patrick Industries has a trailing four-quarter earnings surprise of 34.5%, on average.
The Zacks Consensus Estimate for Patrick Industries’ current financial year sales and EPS suggests growth of 17.3% and 33.1%, respectively, from the year-ago period. Patrick Industries has a Value Score of A. Shares of PATK have fallen 28.2% 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.
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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.
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