Yahoo Finance 4 Low P/CF Stocks to Add to Your Portfolio for Optimum Returns
Market pundits do not expect any drastic change in the economic scenario, at least in the first half of 2023. While the Fed’s recent action to lower the magnitude of the rate hike came as a breather, worries about a slowing economy prevail. So, while you modify your portfolio to cope with the changing market scenario and continued monetary policy tightening, market pundits are placing their bets on value stocks.
Investment in stocks made on diligent value analysis is usually considered one of the best practices. In value investing, investors pick stocks that are cheap but fundamentally sound. 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 company’s business. One such ratio, Price to Cash Flow (or P/CF), can work wonders in stock picking if used prudently. 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. Signet Jewelers Limited SIG, Sterling Infrastructure, Inc. STRL, Tri Pointe Homes, Inc. TPH and Cumulus Media Inc. CMLS boast a low P/CF ratio.
Why P/CF Ratio?
You must be wondering why we are considering this when the most widely used valuation metric is Price/Earnings (or P/E). Well, 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. 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.
A 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.
However, 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 take into account 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 chances 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 a Zacks Rank #1 or 2 offer the best upside potential.
Here are four of the nine stocks that qualified the screening:
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. You can see the complete list of today’s Zacks #1 Rank stocks here.
Signet has a trailing four-quarter earnings surprise of 44.8%, on average. SIG has a Value Score of A. The stock has declined 0.4% in the past year.
Sterling Infrastructure, which is engaged in transportation, e-infrastructure, and building solutions, carries a Zacks Rank #2. It has an expected EPS growth rate of 18% for three-five years. The company has a trailing four-quarter earnings surprise of 20%, on average.
The Zacks Consensus Estimate for Sterling Infrastructure’s current financial-year sales and EPS suggests growth of 21.2% and 46.1%, respectively, from the year-ago period. Sterling Infrastructure has a Value Score of A. The stock has jumped 27.6% in the past year.
Tri Pointe Homes builds premium homes and communities in 10 states. This Zacks Rank #2 company has an expected EPS growth rate of 13% for three-five years. TPH Energy has a Value Score of A.
The Zacks Consensus Estimate for Tri Pointe Homes’ current financial year sales and EPS suggests growth of 2.2% and 23.3%, respectively, from the year-ago period. The company has a trailing four-quarter earnings surprise of 24.3%, on average. Shares of TPH have risen 3.9% in the past year.
Cumulus Media, an audio-first media company delivering premium content, carries a Zacks Rank #2 and has an expected EPS growth rate of 15% for three-five years. CMLS has a Value Score of A.
The Zacks Consensus Estimate for Cumulus Media’s current financial year sales and EPS suggests growth of 2.8% and 291.7%, respectively, from the year-ago period. Shares of CMLS have declined 41.3% 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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Signet Jewelers Limited (SIG) : Free Stock Analysis Report
Cumulus Media, Inc. (CMLS) : Free Stock Analysis Report
Sterling Infrastructure, Inc. (STRL) : Free Stock Analysis Report
Tri Pointe Homes Inc. (TPH) : Free Stock Analysis Report
