Investors seem to be nervous and are treading Wall Street with utmost caution as worries about a global slowdown and a possible recession loom large over the stock market. Market pundits fear that the Federal Reserve’s hawkish stance to tame inflation might push the economy into a recession.
Also, the recent drop in the U.S. unemployment rate to 3.5% in September from 3.7% a month earlier has fueled concerns that the Fed will be aggressive in its approach to tighten monetary policy and cool the economy. Rising borrowing costs would definitely hit consumer spending activity.
Well, the S&P 500, the Dow Jones Industrial Average and the NASDAQ Composite indices have declined 23.6%, 19.4%, and 31.9%, respectively, year to date. So, as investors modify their portfolios to cope with the ongoing challenges and continued monetary policy tightening, market pundits are placing their bets on value stocks.
Value style is considered one of the best practices when it comes to picking stocks. Value investing is essentially about selecting stocks that are fundamentally sound but have been beaten down by some external factors. Such stocks are poised to bounce back as and when investors recognize the inherent value of companies. Certainly, the value investment strategy best suits investors with a long-term horizon.
There are different valuation metrics to determine a stock’s inherent strength. Still, a random selection of a ratio cannot serve your purpose if you want a realistic assessment of a company’s financial position. For this, the Price to Cash Flow (or P/CF) ratio is one of the key metrics. Greif, Inc. GEF, Unum Group UNM, Centene Corporation CNC and MaxLinear, Inc. MXL boast a low P/CF ratio.
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. 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. However, cash flow is reliable. Net cash flow unveils how much money a company is actually generating and how effectively management is deploying the same.
Positive cash flow indicates an increase in a company’s liquid assets. It gives the company the means to settle debt, meet its expenses, reinvest in its business, endure downturns and finally pay back its shareholders. Negative cash flow implies a decline in the company’s liquidity, which in turn lowers its flexibility to support these moves.
However, solely based on the P/CF metric, an investment decision may not fetch the desired results. To identify stocks trading at a discount, you should expand your search criteria and consider 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.
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 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 Zacks Rank #1 or 2 offer the best upside potential.
Here are four of the nine stocks that qualified the screening:
Greif, a global leader in industrial packaging products and services, sports a Zacks Rank #1. It has an expected EPS growth rate of 10% for three-five years. The company has a trailing four-quarter earnings surprise of 22.4%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Greif's current financial-year sales and EPS suggests growth of 15.9% and 43%, respectively, from the year-ago period. GEF has a Value Score of A. The stock has declined 12.4% in the past year.
Unum Group, which provides financial protection benefit solutions, carries a Zacks Rank #2 and has an expected EPS growth rate of 14.9% for three-five years. The company has a trailing four-quarter earnings surprise of 30.1%, on average.
The Zacks Consensus Estimate for Unum Group’s current financial year sales and EPS suggests growth of 1% and 40.9%, respectively, from the year-ago period. Unum Group has a Value Score of A. Shares of UNM have gained 47.7% in the past year.
Centene, a leading healthcare enterprise, carries a Zacks Rank #2 and has an expected EPS growth rate of 14.2% for three-five years. The company has a trailing four-quarter earnings surprise of 3%, on average.
The Zacks Consensus Estimate for Centene’s current financial year sales and EPS suggests growth of 14% and 10.7%, respectively, from the year-ago period. Centene has a Value Score of A. Shares of Centene have rallied 18.5% in the past year.
MaxLinear, a leading provider of radio frequency, analog, digital and mixed-signal integrated circuits, carries a Zacks Rank #2 and has an expected EPS growth rate of 20% for three-five years. MaxLinear has a trailing four-quarter earnings surprise of 7.9%, on average.
The Zacks Consensus Estimate for MaxLinear’s current financial year sales and EPS suggests growth of 25.1% and 55.4%, respectively, from the year-ago period. MaxLinear has a Value Score of B. Shares of MaxLinear have fallen 27.6% 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.
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