As the economy gradually accelerates, many market experts are betting on value stocks. Investing in stocks made on a diligent value analysis is generally considered to be one of the best practices. In value investing, investors choose cheap but fundamentally healthy stocks. 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 business of the business. Such a report, Price to cash flow (or P / CF), can do wonders in stock selection, if used with caution. This metric evaluates the market price of a stock relative to the amount of cash flow the company generates per share – the lower the number, the better.
You must be wondering why we are considering this when the most widely used valuation measure is price / earnings (or P / E). Well, one of the important factors that makes P / CF a very reliable measure is that operating cash flow adds non-cash charges like depreciation and amortization back to the bottom line, truly diagnosing financial health. from a company.
Analysts warn that a company’s profits are subject to accounting estimates and management manipulation. Again, the cash flow is quite reliable. Free cash flow shows how much money a business actually generates and how effectively management deploys it.
A positive cash flow indicates an increase in the company’s liquidity. This gives the company the means to settle its debts, to cover its expenses, to reinvest in its company, to endure the slowdowns and finally to take steps favorable to the shareholders. A negative cash flow implies a decrease in the company’s liquidity, which, in turn, reduces its flexibility to support these efforts.
However, an investment decision based solely on the P / CF metric may not achieve the desired results. To identify stocks that are trading at a discount, you need to broaden your search criteria to consider price-to-book ratio, price-to-earnings ratio, and price-to-sell ratio. Added favorable Zacks rank and Value Note of A or B to your search criteria should lead to even better results as they eliminate the risk of falling into a value trap.
The bargain hunting strategy
Here are the parameters for selecting real-value stocks:
P / CF less than or equal to the X-Industry median.
Price greater than or equal to 5: The stocks should all trade at a minimum of $ 5 or more.
Average volume over 20 days greater than 100,000: A substantial trading volume ensures that the stock is easily tradable.
P / E using (F1) less than or equal to the X-Industry median: This setting preselects stocks that trade at a discount or are equal to peers.
P / B less than or equal to the X-Industry median: A P / B below the industry average implies that there is enough room for the stock to win.
P / S less than or equal to the 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 growth in profits of the company. The PEG report gives a more complete picture than the P / E report. A value less than 1 indicates that the stock is undervalued and investors should pay less for a stock that has strong prospects for earnings growth.
Rank of Zacks less than or equal to 2: Zacks Rank # 1 (Strong Buy) or 2 (Buy) stocks are known to outperform regardless of the market environment.
Score value less than or equal to B: Our research shows that stocks with a style score of A or B when combined with a Zacks # 1 or 2 ranking offer the best upside potential.
Here are five of the 20 actions that qualified the screening:
Vale SA (VALLEY – Free Report), which produces and sells iron ore and iron ore pellets for use as raw materials in steelmaking, has a Zacks # 1 rank and an expected EPS growth rate of 30.7 % for three to five years. The company has a surprise earnings for the last four quarters of 14.3%, on average. You can see The full list of today’s Zacks # 1 Rank stocks here.
Atlas Corp. (ATCO – Free Report), one of the world’s leading asset management companies, is ranked Zacks Rank # 2. It has an expected EPS growth rate of 14.5% over three to five years. The company has a surprise profit for the last four quarters of 7.2% on average.
Group of Affiliated Managers, Inc. (AMG – Free Report), an asset management company providing investment management services to mutual funds, institutional clients and high net worth individuals, holds a Zacks Rank # 2. It has an expected EPS growth rate of 15% over three to five years. The company has a surprise earnings for the last four quarters of 8.4% on average.
Celestica Inc. (CLS – Free Report), which provides hardware platform and supply chain solutions, has an expected EPS growth rate of 10.2% over three to five years. This Zacks Rank # 2 company has a surprise profit over the last four quarters of 15.5%, on average.
Blucora, Inc. (BCOR – Free Report), which provides technology-based financial solutions, has a Zacks Rank # 2 and an expected EPS growth rate of 15% for three to five years. The company has a surprise earnings for the last four quarters of 27.5%, on average.
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Disclosure: Information on the performance of Zacks’ portfolios and strategies can be found at: https://www.zacks.com/performance.