4 Value Stocks to Buy After the Thanksgiving Market Surge

The major U.S. indices steadily rose the day before Thanksgiving. The Dow Jones Industrial Average gained 314.67 points, closing at 47,427.12, while the S&P 500 increased by 46.73 points to settle at 6,812.61. The Nasdaq Composite outperformed both with a gain of 0.82%, finishing at 23,214.69.

This momentum was boosted by a noticeable shift in expectations about Federal Reserve policy. Growing confidence that policymakers might cut interest rates as soon as next month brought optimism. Meanwhile, concerns about an overvalued artificial intelligence sector began to ease, reducing some of the pressure on market sentiment.

Value stocks present an appealing opportunity against this backdrop. This is because lower borrowing costs tend to benefit companies with stable earnings and discounted valuations. 

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 — Great Lakes Dredge & Dock Corporation GLDD, StoneCo Ltd. STNE, PG&E Corporation PCG and EnerSys ENS — 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 14 value stocks that qualified the screening:

Great Lakes Dredge & Dock, the largest provider of dredging services in the United States, sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 65.5%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Great Lakes Dredge & Dock’s current financial-year sales and EPS indicates growth of 11.6% and 31%, respectively, from the year-ago period. GLDD has a Value Score of A. Shares of GLDD have risen 0.2% in the past year.

Stone, a leading provider of financial technology and software solutions, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 9.1%, on average. 

The Zacks Consensus Estimate for Stone’s current financial-year sales and EPS calls for growth of 12.7% and 27.4%, respectively, from the year-ago period. STNE has a Value Score of A. Shares of STNE have rallied 68% in the past year.

PG&E Corporation, an energy holding company that owns Pacific Gas and Electric Company, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 0.5%, on average. 

The Zacks Consensus Estimate for PG&E Corporation’s current financial-year sales and EPS suggests growth of 6.7% and 10.3%, respectively, from the year-ago period. PCG has a Value Score of A. Shares of PCG have declined 26% in the past year.

EnerSys, a global leader in stored energy solutions, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 4.9%, on average.

The Zacks Consensus Estimate for EnerSys’ current financial-year sales and EPS implies growth of 4% and 1.3%, respectively, from the year-ago period. ENS has a Value Score of B. Shares of ENS have surged 47.8% 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 is available at: https://www.zacks.com/performance.

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