U.S. stocks extended their slide on Tuesday as intensifying trade tensions rattled investor confidence. The current administration's decision to impose tariffs on imports from Canada, Mexico and China triggered immediate retaliation from these trading partners, heightening concerns about corporate earnings and overall economic momentum.
The Dow Jones Industrial Average tumbled 670.25 points, or 1.55%, to close at 42,520.99, following Monday’s sharp 650-point decline. The S&P 500 fell 1.22% to settle at 5,778.15, while the Nasdaq Composite shed 0.35%, finishing at 18,285.16.
As investors brace for continued volatility, concerns about the trade war and its potential repercussions remain at the forefront. Amid such a scenario, value stocks could draw attention as a compelling investment option. Often trading below their intrinsic value, they provide a margin of safety, which can be especially appealing amid market uncertainties.
When evaluating value stocks, one of the most effective valuation metrics is the Price to Cash Flow (P/CF) ratio. Companies like EnerSys ENS, Sonoco Products Company SON, Verint Systems Inc. VRNT and General Motors Company GM boast a low P/CF ratio. The P/CF ratio 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.
You must be wondering why we consider the P/CF valuation metric when the most widely used valuation metric is Price/Earnings (or P/E). An important factor that makes 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.
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.
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 should expand your search criteria and also consider 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 chance of falling into a value trap.
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 their 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 a Zacks Rank #1 or 2 offer the best upside potential.
Here are four of the 16 value stocks that qualified the screening:
EnerSys, the global leader in stored energy solutions for industrial applications, sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 2.2%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for EnerSys’ current financial year sales and earnings per share (EPS) suggests growth of 1% and 19.8%, respectively, from the year-ago period. ENS has a Value Score of A. Shares of ENS have risen 7.5% in the past year.
Sonoco Products, a global leader in high-value sustainable packaging, sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 2%, on average.
The Zacks Consensus Estimate for Sonoco Products’ current financial year sales and EPS calls for growth of 26.6% and 42.9%, respectively, from the year-ago period. SON has a Value Score of A. Shares of SON have declined 18.2% in the past year.
See the Zacks Earnings Calendar to stay ahead of market-making news.
Verint Systems, a leader in customer experience automation, sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 8.8%, on average.
The Zacks Consensus Estimate for Verint Systems’ current financial year sales and EPS suggests growth of 2.3% and 6.2%, respectively, from the year-ago period. VRNT has a Value Score of B. Shares of VRNT have fallen 27.5% in the past year.
General Motors, which designs, builds and sells cars, trucks, crossovers and automobile parts globally, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 15.8%, on average.
The Zacks Consensus Estimate for General Motors’ current financial year EPS suggests growth of 8% from the year-ago period. General Motors has a Value Score of A. Shares of GM have rallied 16.6% in the past year.
You can get the rest of the stock 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 back test them first before taking the investment plunge.
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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 is available at: https://www.zacks.com/performance.
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Sonoco Products Company (SON) : Free Stock Analysis Report
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Verint Systems Inc. (VRNT) : Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).
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