4 Value Stocks to Buy as Inflation Concerns Keep Markets Cautious
The U.S. equity market stayed largely subdued as investors assessed fresh inflation data signaling continued price pressures. The Personal Consumption Expenditures price index, a key measure policymakers track, rose 0.2% in July from the prior month, putting annual inflation at 3.7%. The reading suggested that inflation has not yet returned to levels that would provide greater confidence in a meaningful shift in monetary policy, keeping investors cautious.
Major indexes reflected a restrained trading environment, with the S&P 500 ending nearly unchanged at 7,675.70. The Nasdaq Composite edged lower by 0.08% to close at 26,130.20, while the Dow Jones Industrial Average declined 113.52 points, or 0.21%, finishing at 53,463.88. The limited movement across benchmarks indicated that investors were balancing persistent inflation concerns with expectations about the broader economic outlook and potential implications for interest rate decisions.
Against this backdrop, value stocks may present an attractive opportunity for investors seeking exposure to fundamentally strong companies trading at reasonable valuations. If investor sentiment improves and market participants increasingly focus on underlying business performance, undervalued companies could benefit from potential valuation re-rating, creating opportunities for long-term capital appreciation.
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 — Avnet, Inc. AVT, Lifetime Brands, Inc. LCUT, Arrow Electronics, Inc. ARW 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 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 20 value stocks that qualified the screening:
Avnet, a leading global technology distributor and solutions provider, sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 13.8%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Avnet’s current financial-year sales and EPS indicates growth of 23.5% and 84.3%, respectively, from the year-ago period. AVT has a Value Score of A.
Lifetime Brands, a leading global provider of branded kitchenware, tableware and other products, sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 271.1%, on average.
The Zacks Consensus Estimate for Lifetime Brands’ current financial-year sales and EPS calls for growth of 4.4% and 156.8%, respectively, from the year-ago period. LCUT has a Value Score of A.
Arrow Electronics sources and engineers technology solutions for thousands of leading manufacturers and service providers. The stock sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 34.4%, on average.
The Zacks Consensus Estimate for Arrow Electronics’ current financial-year sales and EPS implies growth of 22.2% and 85.5%, respectively, from the year-ago period. ARW has a Value Score of A.
Invesco, a leading global asset management firm, sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 12.5%, on average.
The Zacks Consensus Estimate for Invesco’s current financial-year sales and EPS suggests growth of 15.4% and 38.9%, respectively, from the year-ago period. IVZ has a Value Score of B.
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See them now >>Avnet, Inc. (AVT) : Free Stock Analysis Report
Invesco Ltd. (IVZ) : Free Stock Analysis Report
Arrow Electronics, Inc. (ARW) : Free Stock Analysis Report
Lifetime Brands, Inc. (LCUT) : Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).
