Pick These 4 Low P/CF Stocks to Sail Through a Volatile Market

The stock market is trying to cope with geopolitical tension, thanks to the Russia and Ukraine conflict, supply chain challenges, and soaring inflation. The consumer price index rose 1.2% month on month in March, following an increase of 0.8% in February. On a year-over-year basis, the metric rose 8.5%, the fastest pace since December 1981. With the desperate need to tame shooting commodity prices, the Federal Reserve recently announced a 50-basis point hike in benchmark interest rate. This followed a 25-basis point increase announced in March.

The policymakers have hinted at tightening the monetary policy methodically. Meanwhile, the U.S. GDP shrunk at a pace of 1.4% in the first quarter. There is a clear indication that market will remain volatile in the near term. With the S&P 500 index falling 16.3% year to date and the tech-laden Nasdaq Composite index down 25.7%, a prudent investment strategy is the need of the hour.

Investors always try to hit the jackpot while picking stocks. But striking the right chord each time is not easy unless you are blessed with Midas touch. When it comes to the investment market, experts consider value style as one of the most effective approaches. Value investing is essentially about selecting stocks that have good things going for them at a time when they have been beaten down by some external factor.

There are different valuation metrics to determine a stock’s inherent strength but a random selection of ratios cannot serve your purpose if you want a realistic assessment of a company’s financial position. For this, we recommend Price to Cash Flow (or P/CF) as one of the key metrics. 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, Target Corporation TGT and Signet Jewelers Limited SIG boast a low P/CF ratio.

Price to Cash Flow Reveals Financial Health

Questions may arise as to why we are considering the Price to Cash Flow valuation metric, when the most widely used metric is Price/Earnings (or P/E). Well, what makes P/CF stand out is that operating cash flow adds back non-cash charges such as depreciation and amortization to net income, truly reflecting the financial health of a company.

Analysts caution that a company’s earnings are subject to accounting estimates and management manipulation. However, cash flow is reliable. It is net cash flow that reveals how much money a company is actually generating and how effectively management is putting the same to use.

A positive cash flow indicates an increase in the company’s liquid assets. This gives the company the means to settle debt, shell out for its expenses, reinvest in its business, endure downturns and finally pay back its shareholders. Then again, a negative cash flow implies a decline in the company’s liquidity, which in turn lowers its flexibility to support these moves.

What’s the Best Strategy?

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 also 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.

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 portrays 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 19 stocks that qualified the screening:

Vishay Intertechnology, which manufactures and supplies discrete semiconductors and passive electronic components, has a Zacks Rank #1 and 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 20.1% 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 20.4% in the past year.

Target, a general merchandise retailer in the United States, has a Zacks Rank #2 and an expected EPS growth rate of 16.5% for three-five years. The company has a trailing four-quarter earnings surprise of 21.3%, on average.

The Zacks Consensus Estimate for Target’s current financial year sales and EPS suggests growth of 3.7% and 7.3%, respectively, from the year-ago period. Target has a Value Score of A. Shares of TGT have gained 7.1% in the past year.

Signet, the world's largest retailer of diamond jewelry, carries a Zacks Rank #2. It has an expected EPS growth rate of 8% for three-five years. The company has a trailing four-quarter earnings surprise of 73.8%, on average.

The Zacks Consensus Estimate for Signet's current financial year sales suggests growth of 5.2% from the year-ago period. SIG has a Value Score of A. The stock has risen 8.1% 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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Target Corporation (TGT) : Free Stock Analysis Report
 
Signet Jewelers Limited (SIG) : Free Stock Analysis Report
 
Celestica, Inc. (CLS) : Free Stock Analysis Report
 
Vishay Intertechnology, Inc. (VSH) : Free Stock Analysis Report
 
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