4 Value Stocks to Buy as Markets Eye Earnings and Government Shutdown

The S&P 500 dropped 0.28% to 6,735.11, the Nasdaq slipped 0.08% to 23,024.63, and the Dow fell 243.36 points, or 0.52%, closing at 46,358.42 yesterday, owing to concerns over the ongoing U.S. government shutdown. Attention is now shifting to the earnings season, with investors closely monitoring whether the shutdown could slow economic activity or affect corporate results. Market pundits are evaluating potential impacts on consumer confidence and business spending, while markets remain on edge. This backdrop makes a compelling case for value investing. 

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, Universal Health Services, Inc. UHS, Integer Holdings Corporation ITGR and Great Lakes Dredge & Dock Corporation GLDD — that boast a low P/CF ratio.

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, reflecting 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. 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 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 12 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 9.8% and 20%, respectively, from the year-ago period. STNE has a Value Score of B. Shares of STNE have advanced 63.5% 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 20% in the past year.

Universal Health Services, one of the nation's largest hospital companies, operating through its subsidiaries, acute care hospitals, behavioral health facilities and ambulatory centers, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 9.4%, on average. 
 
The Zacks Consensus Estimate for Universal Health Services’ current financial-year sales and EPS calls for growth of 8.5% and 23%, respectively, from the year-ago period. Universal Health Services has a Value Score of A. Shares of UHS have declined 5.9% in the past year.

Great Lakes Dredge & Dock, the largest provider of dredging services in the United States, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 45.3%, on average. 
 
The Zacks Consensus Estimate for Great Lakes Dredge & Dock’s current financial-year sales and EPS indicates growth of 9% and 21.4%, respectively, from the year-ago period. Great Lakes Dredge & Dock has a Value Score of A. Shares of GLDD have declined 1.2% 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 is available at: https://www.zacks.com/performance.

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

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research