Wall Street ended lower on Monday as investors reacted to renewed geopolitical tensions in the Middle East after President Donald Trump reinstated a U.S. blockade on Iranian shipping through the Strait of Hormuz. The move followed a fresh exchange of airstrikes between the United States and Iran, heightening concerns about potential disruptions to global energy supplies.
The S&P 500 declined 0.79% to close at 7,515.34, while the Nasdaq Composite dropped 1.55% to 25,873.18, recording the sharpest decline among the major benchmarks. The Dow Jones Industrial Average was relatively resilient but still ended the session down 0.26% at 52,498.64. Meanwhile, crude oil prices surged following Trump’s announcement, reflecting growing concerns about supply flows through the strategically important waterway.
Against this backdrop, investors may find value stocks increasingly appealing. Companies with durable earnings, healthy balance sheets and attractive valuations have historically been better equipped to withstand periods of market turbulence.
When evaluating value stocks, one of the most effective valuation metrics is the Price-to-Cash Flow (P/CF) ratio. This metric measures a stock's market price relative to the cash flow the company generates on a per-share basis. A lower P/CF ratio indicates that the stock is trading at a better value, offering strong cash generation potential relative to its price. Companies — Nexa Resources S.A. NEXA, StoneCo Ltd. STNE, General Motors Company GM and Invesco Ltd. IVZ — boast a low P/CF ratio.
Price to Cash Flow Reflects Financial Health
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.
What’s the Best Value Investing Strategy?
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 out of the 14 value stocks that qualified the screening:
Nexa Resources, a large-scale, low-cost, integrated polymetallic producer, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 59.9%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Nexa Resources’ current financial-year sales and EPS implies growth of 14.5% and 217.7%, respectively, from the year-ago period. NEXA has a Value Score of A. Shares of NEXA have soared 173.9% over the past year.
Stone, a leading provider of financial technology solutions, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 3.1%, on average.
The Zacks Consensus Estimate for Stone’s current financial-year sales and EPS indicates growth of 10.3% and 42.6%, respectively, from the year-ago period. STNE has a Value Score of A. Shares of STNE have fallen 25% over the past year.
General Motors, which designs, builds and sells trucks, crossovers, cars and automobile parts worldwide, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 20.3%, on average.
The Zacks Consensus Estimate for General Motors’ current financial-year sales and EPS indicates growth of 0.1% and 21.2%, respectively, from the year-ago period. GM has a Value Score of A. Shares of GM have rallied 45.5% over the past year.
Invesco, a leading global asset management firm, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 7.9%, on average.
The Zacks Consensus Estimate for Invesco’s current financial-year sales and EPS indicates growth of 14.4% and 34.5%, respectively, from the year-ago period. IVZ has a Value Score of A. Shares of Invesco have surged 69.6% over the past year.
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Invesco Ltd. (IVZ): Free Stock Analysis Report
General Motors Company (GM): Free Stock Analysis Report
Nexa Resources S.A. (NEXA): Free Stock Analysis Report
StoneCo Ltd. (STNE): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).