4 Low Price-to-Cash Flow Stocks to Refine Your Portfolio

As earnings flood the market this week, investors are poised to dissect not only the financial results but also the implications of the Federal Reserve meeting. While prevailing sentiment suggests a status quo in interest rates, the focus is more on the Fed's assessment of economic conditions and its strategic outlook. This pivotal juncture underscores the importance of a diversified investment approach.

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

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. KB Home KBH, Affiliated Managers Group, Inc. AMG, PagSeguro Digital Ltd. PAGS and General Motors Company GM 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 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 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 a Zacks Rank #1 or 2, offer the best upside potential.

Here are four of the 11 stocks that qualified the screening.

KB Home, one of the largest and most recognized homebuilders in the United States, sports a Zacks Rank #1. The company delivered a trailing four-quarter earnings surprise of 26.1%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for KB Home's current financial year sales and EPS suggests growth of 5.6% and 13.9%, respectively, from the year-ago period. KBH has a Value Score of A. Shares of KBH have soared 50.2% in the past year.

Affiliated Managers Group, a New York City-based investment adviser and leading value investing firm, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 7.1%, on average.

The Zacks Consensus Estimate for Affiliated Managers Group’s current financial year sales and EPS suggests growth of 4.5% and 13.1%, respectively, from a year ago. Affiliated Managers has a Value Score of A. The stock has gained 9.5% in the past year.

PagSeguro Digital, which provides financial technology solutions and services, carries a Zacks Rank #2. The company delivered a trailing four-quarter earnings surprise of 10.1%, on average.

The Zacks Consensus Estimate for PagSeguro Digital’s current financial year sales and EPS suggests growth of 1.8% and 18.4%, respectively, from the year-ago period. PAGS has a Value Score of A. Shares of PAGS have advanced 30.3% 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 17.8%, on average.

The Zacks Consensus Estimate for General Motors’ current financial year sales and EPS suggests growth of 1.6% and 22.1%, respectively, from the year-ago period. General Motors has a Value Score of A. Shares of GM have risen 37.5% 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.

Click here to sign up for a free trial to the Research Wizard today.

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.

Zacks Names "Single Best Pick to Double"

From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all.

It’s an American AI company that’s riding low right now, but it has rounded up clients like BMW, GE, Dell Computer, and Bosch. It has prospects for not just doubling but quadrupling in the year to come. Of course, all our picks aren’t winners but this one could far surpass earlier Zacks’ Stocks Set to Double like Boston Beer Company which shot up +143.0% in little more than 9 months and NVIDIA which boomed +175.9% in one year.

Free: See Our Top Stock And 4 Runners Up

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

General Motors Company (GM) : Free Stock Analysis Report

KB Home (KBH) : Free Stock Analysis Report

Affiliated Managers Group, Inc. (AMG) : Free Stock Analysis Report

PagSeguro Digital Ltd. (PAGS) : Free Stock Analysis Report

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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