4 Value Stocks Every Investor Should Hold in Volatile Times

The market struggled on Wednesday as technology and semiconductor stocks faced broad selling, reflecting investor concerns about lofty valuations and the sustainability of the AI-driven rally. Sentiment was further tempered by mixed retail earnings results, which contributed to a cautious tone. The S&P 500 and Nasdaq Composite edged lower, sliding 0.24% and 0.67%, respectively. Given the current market scenario, it is prudent to shift focus toward value stocks. 

When evaluating value stocks, one of the most effective valuation metrics is the Price to Cash Flow (P/CF) ratio. Companies like StoneCo Ltd. STNE, CVS Health Corporation CVS, Integer Holdings Corporation ITGR and USANA Health Sciences, Inc. USNA boast a low P/CF ratio. The P/CF ratio 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.

Price to Cash Flow Reflects Financial Health

Value investing is considered one of the best practices when it comes to picking stocks. It is essentially about selecting stocks that are fundamentally sound but have been beaten down by some external factors. Such stocks are poised to bounce back as and when investors recognize the inherent value of companies. Certainly, the value investment strategy best suits investors with a long-term horizon.

There are different valuation metrics to determine a stock’s inherent strength. Still, a random selection of a ratio cannot serve your purpose if you want a realistic assessment of a company’s financial position. For this, the Price to Cash Flow ratio is one of the key metrics. 

Price-to-Cash-Flow 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. One of the important factors 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. However, cash flow is reliable. Net cash flow unveils how much money a company is actually generating and how effectively management is deploying the same.

Positive cash flow indicates an increase in a company’s liquid assets. It gives the company the means to settle debt, meet its expenses, reinvest in its business, endure downturns and finally pay back its shareholders. 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 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 Zacks Rank #1 or 2, offer the best upside potential.

Here are four of the 15 value stocks that qualified the screening:

Stone, a leading provider of financial technology and software solutions, sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 11.5%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Stone’s current financial-year sales and EPS indicates growth of 7.6% and 10.4%, respectively, from the year-ago period. STNE has a Value Score of B. Shares of STNE have risen 7.3% in the past year.

CVS Health, a leading health solutions company, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 22.6%, on average. 

The Zacks Consensus Estimate for CVS Health’s current financial-year sales and EPS suggests growth of 4.7% and 16.6%, respectively, from the year-ago period. CVS Health has a Value Score of A. Shares of CVS have jumped 22.7% in the past year.

Integer Holdings, one of the largest medical device contract development and manufacturing organizations, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 1.3%, on average.

The Zacks Consensus Estimate for Integer Holdings’ current financial-year sales and EPS calls for growth of 7.8% and 20.4%, respectively, from the year-ago period. Integer Holdings has a Value Score of B. Shares of ITGR have fallen 13.2% in the past year.

USANA Health Sciences, which develops and manufactures high-quality nutritional supplements, functional foods and personal care products, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 21.6%, on average. 

The Zacks Consensus Estimate for USANA Health Sciences’ current financial-year sales and EPS implies growth of 11.7% and 1.2%, respectively, from the year-ago period. USNA has a Value Score of A. Shares of USNA have declined 21.1% 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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