4 Low Price-to-Cash Flow Stocks to Refine Your Portfolio

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Investors always try to hit the jackpot by picking stocks. But hitting the right chord every time isn’t easy unless you’re blessed with the Midas touch. When it comes to the investment market, experts consider the value style to be one of the most effective approaches. Value investing is basically picking stocks that have good things to do at a time when they have been beaten by certain external factors. For now, the Russia-Ukraine conflict, supply chain bottlenecks and soaring inflation have dulled the luster of the stock market.

There are various valuation measures to determine the inherent strength of a stock, but a random selection of ratios cannot serve your purpose if you want a realistic assessment of a company’s financial condition. For this, we recommend Price to Cash Flow (or P/CF) as one of the key metrics. This measure assesses the market price of a stock relative to the amount of cash flow the company generates per share – the lower the number, the better. Signet Jewelers Limited GIS, Marathon Oil Corporation MRO, ArcBest Corporation ARCB and Unum Group UNM and display a low P/CF ratio.

Price vs. Cash Flow Reveals Financial Health

Questions may arise as to why we are considering the valuation measure of price versus cash flow, when the most widely used measure is price/earnings (or P/E). Well, what sets P/CF apart is that cash flow from operations adds non-cash charges like depreciation and amortization back to net income, truly reflecting a company’s financial health.

Analysts warn that a company’s earnings are subject to accounting estimates and management manipulation. However, the cash is reliable. It is net cash flow that reveals how much cash a company actually generates and how effectively management uses it.

A positive cash flow indicates an increase in the company’s liquidity. This gives the company the means to settle its debts, disburse its expenses, reinvest in its business, endure downturns and ultimately repay its shareholders. Again, a negative cash flow implies a decline in the company’s liquidity, which reduces its flexibility to support these movements.

What is the best 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 need to broaden your search criteria and also consider price-to-book ratio, price-to-earnings ratio, and price-to-sales ratio. Added a favorable Zacks rank and a Value rating of A or B to your search criteria should lead to even better results because these eliminate the risk of falling into a value trap.

Here are the real value stock selection parameters:

P/CF less than or equal to the X-Industry median.

Price greater than or equal to 5: The stocks must all trade at a minimum of $5 or more.

Average volume over 20 days greater than 100,000: Substantial trading volume ensures that the stock is easily tradable.

P/E using (F1) less than or equal to X-Industry Median: This setting preselects stocks that are trading at a discount or equal to its peers.

P/B less than or equal to the X-Industry median: A lower P/B relative to the industry average implies that there is enough room for the stock to win.

P/S less than or equal to X-Industry Median: The P/S ratio determines how a stock’s price compares to the company’s sales – the lower the ratio, the more attractive the stock.

PEG less than 1: The ratio is used to determine the value of a stock taking into account the company’s earnings growth. The PEG ratio gives a more complete picture than the P/E ratio. A value below 1 indicates the stock is undervalued and investors should pay less for a stock that offers strong earnings growth prospects.

Zacks rank less than or equal to 2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform regardless of the market environment.

Value score less than or equal to B: Our research shows that stocks with a Style Score of A or B when combined with Zacks Rank #1 or 2 offer the most upside potential.

Here are four of the 11 actions that qualified the screening:

Seal, the world’s largest diamond jewelry retailer, sports a Zacks No. 1 ranking. It has an expected EPS growth rate of 8% over three to five years. The company has a surprise on earnings for the last four quarters of 65.5% on average. You can see the full list of today’s Zacks #1 Rank stocks here.

Zacks’ consensus estimate for Signet’s current-year sales and EPS suggests growth of 5.1% and 1.6%, respectively, over the prior-year period. SIG has a value score of A. The stock is down 23.3% over the past year.

Marathon Oil Corporation, which is engaged in the exploration, production and marketing of crude oil and condensates, natural gas liquids and natural gas, has a Zacks rank #2 and an expected EPS growth rate of 14.4% over three to five years. The company has a four-quarter earnings surprise of 23%, on average.

Zacks consensus estimate for Marathon Oil Corporation’s current year sales and EPS suggests growth of 47.4% and 219.1%, respectively, over the prior year period. Marathon Oil Corporation has a value score of A. MRO shares are up 69.5% over the past year.

ArcBest Corporation, which provides freight transportation and integrated logistics services, carries a Zacks rank of No. 2. It has an expected EPS growth rate of 23.8% over three to five years. The company has an earnings surprise for the last four quarters of 25.6% on average.

Zacks’ consensus estimate for ArcBest Corporation’s current-year sales and EPS suggests growth of 34% and 59.4%, respectively, over the prior-year period. ARCB has a value score of A. The stock has jumped 17.9% over the past year.

Unum Group, which provides financial protection solutions, has a Zacks No. 2 ranking and an expected EPS growth rate of 11.9% over three to five years. The company has an earnings surprise for the last four quarters of 22.1% on average.

Zacks’ consensus estimate for Unum Group’s current-year sales and EPS suggests growth of 0.7% and 17.2%, respectively, over the prior-year period. Unum Group has a value score of A. Shares of UNM have gained 17.4% over the past year.

You can get the rest of the stocks on this list by signing up for your free 2-week trial to Research Assistant now and start using this screen in your own trading. Moreover, you can also create your own strategies and test them before diving into investing.

The research assistant is a great starting point. It’s easy to use. Everything is in plain language. And it’s very intuitive. Start your search assistant trial today. And the next time you’re reading an economic report, open up the research assistant, plug in your findings, and see what gems come out.

Click here to sign up for a free trial of Research Assistant today.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold securities short and/or hold long and/or short positions in the options mentioned herein. An affiliated investment advisory firm may hold or have shorted securities and/or hold long and/or short positions in options mentioned herein.

Disclosure: Information on the performance of Zacks portfolios and strategies is available at: https://www.zacks.com/performance.

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Marathon Oil Corporation (MRO): Free Stock Analysis Report

Unum Group (UNM): Free Stock Analysis Report

Signet Jewelers Limited (SIG): Free Stock Analysis Report

ArcBest Corporation (ARCB): Free Inventory Analysis Report

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