StoneCo Ltd. Skechers U.S.A., Inc., Pfizer Inc. and General Motors Company stocks are strong value stocks to buy right now.
Value stocks have a low price-to-cash-flow ratio, which measures the stock share price relative to the company's cash flow.
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The U.S. stock market continued its upward momentum on Monday, reaching fresh highs amid optimism spurred by the recent presidential election and favorable economic signals. Wall Street's major indexes closed at new highs, building on Friday's record-breaking performance. Investors appear increasingly positive about the prospects of pro-growth fiscal policies under President-elect Donald Trump, while the Federal Reserve's recent interest rate cut has also bolstered market sentiment.
The S&P 500 rose 0.10% to close at 6,001.35, while the Nasdaq Composite jumped 0.06%, ending the session at 19,298.76. Leading the gains, the Dow Jones Industrial Average climbed 0.69% to reach 44,293.13. Bitcoin also hit unprecedented levels, marking a significant milestone in the cryptocurrency market.
As major indexes hit record highs and digital assets reach unprecedented levels, investors might consider balancing their portfolios with value stocks. Typically trading below their intrinsic value, these stocks offer a margin of safety during market fluctuations.
When evaluating value stocks, one of the most effective valuation metrics is the Price to Cash Flow (P/CF) ratio. This metric measures the market price of a stock 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. Here are four companies — StoneCo Ltd. STNE, Skechers U.S.A., Inc. SKX, Pfizer Inc. PFE and General Motors Company GM — that boast low P/CF ratios, making them strong contenders for value-seeking investors.
Price to Cash Flow Reveals Financial Health
Questions may arise as to why we are considering the P/CF 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 Value Investing 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 nine value stocks that qualified the screening:
StoneCo is a leading provider of financial technology and software solutions that facilitate merchants to conduct commerce seamlessly. This Zacks Rank #1 company has a trailing four-quarter earnings surprise of 5.4%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for StoneCo’s current financial year sales and earnings per share (EPS) suggests growth of 0.2% and 24.7%, respectively, from the year-ago period. STNE has a Value Score of B. Shares of STNE have decreased 4.4% in the past year.
Skechers designs, develops and markets a diverse range of lifestyle and performance footwear, apparel, and accessories. This Zacks Rank #2 company has a trailing four-quarter earnings surprise of 8.8%, on average.
The Zacks Consensus Estimate for Skechers’ current financial year sales and EPS suggests growth of 12.2% and 20.6%, respectively, from the year-ago period. Skechers has a Value Score of A. Shares of SKX have rallied 23.5% in the past year.
Find the latest EPS estimates and surprises on Zacks Earnings Calendar.
Pfizer, which develops, manufactures, markets, distributes, and sells biopharmaceutical products, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 74.5%, on average.
The Zacks Consensus Estimate for Pfizer’s current financial year sales and EPS suggests growth of 7.7% and 56.5%, respectively, from the year-ago period. Pfizer has a Value Score of A. Shares of PFE have declined 9.4% 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 17.5%, on average.
The Zacks Consensus Estimate for General Motors’ current financial year sales and EPS suggests growth of 4.8% and 34%, respectively, from the year-ago period. General Motors has a Value Score of A. Shares of GM have advanced 114.4% in the past year.
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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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