7 Low Price-to-Cash-Flow Stocks To Fetch Higher Returns

Investments in stocks made from diligent value analysis is usually considered one of the best practices. In value investing, investors pick stocks that are cheap but fundamentally sound. So the chance of these stocks allowing investors to book profit is high when the market moves higher. Thus, for long-term investors, it is always best to look for the intrinsic value of stocks.

The use of different valuation metrics to determine a stock’s inherent strength is not new in the financial world. But a random selection of a ratio cannot serve your purpose if you want a realistic assessment of a company’s financial position. For this, we would suggest considering Price to Cash Flow (or P/CF) ratio 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.

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 gives P/CF an upper hand 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. On the other hand, cash flow is reliable. It is net cash flow that unveils how much money a company is actually generating 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, shell out for its expenses, reinvest in its business, endure downturns and finally pay back its shareholders. On the other hand, a negative cash flow implies a decline in the company’s liquidity, which in turn lowers its flexibility to support these moves.

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 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 give you even better results as they eliminate the chance 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 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. 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 investors need to pay less for a stock that has robust earnings growth prospect.

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 Zacks Rank #1 or 2 offer the best upside potential.

Here are seven of the 13 stocks that qualified the screening:

JinkoSolar Holding Co., Ltd. ( (NYSE:JKS) )

Carnival (LON:CCL) plc ( (NYSE:CUK) )

Dean Foods Company ( (NYSE:DF) )

PharMerica Corporation ( (NYSE:PMC) )

Air Methods Corp. ( (NASDAQ:AIRM) )

Tower International, Inc. ( (NYSE:TOWR) )

Korea Electric Power Corp. ( (NYSE:KEP) )

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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: http://www.zacks.com/performance.

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