4 Value Stocks to Buy As Wall Street Weighs Trump Policies

Wall Street declined as financial stocks fell amid renewed policy concerns, undermining investor confidence. As equities dropped, a rush to safe havens drove gold to new highs. Meanwhile, crude oil prices rose as geopolitical tensions involving Iran escalated.

The Dow Jones Industrial Average fell 0.80% (or 398.21 points) yesterday to close at 49,191.99, the S&P 500 ended 0.19% (or 13.53 points) lower at 6,963.74, and the Nasdaq Composite dipped 0.10% (or 24.03 points) to 23,709.87. Markets weighed President Trump’s proposals, including possible caps on credit card interest rates and a proposed 25% tariff on countries that trade with Iran.

Against this backdrop of elevated macro uncertainty, value stocks may offer a more disciplined path to returns. Often trading below their intrinsic value, these stocks offer a safety margin that is especially appealing during periods of market uncertainty. When evaluating value stocks, one of the most effective valuation metrics is the Price to Cash Flow (P/CF) ratio. 

Companies like Universal Health Services, Inc. UHS, The PNC Financial Services Group, Inc. PNC, Global Payments Inc. GPN and BioMarin Pharmaceutical Inc. BMRN 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 11 value stocks that qualified the screening:

Universal Health Services, which owns and operates acute care hospitals, and outpatient and behavioral health care facilities, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 15.2%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Universal Health Services’ current financial-year sales and EPS indicates growth of 9.7% and 31.4%, respectively, from the year-ago period. UHS has a Value Score of A. Shares of UHS have risen 9.9% in the past year.

PNC Financial Services, one of the largest diversified financial services institutions in the United States, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 8.3%, on average. 

The Zacks Consensus Estimate for PNC Financial Services’ current financial-year sales and EPS calls for growth of 7% and 15%, respectively, from the year-ago period. PNC has a Value Score of B. Shares of PNC have jumped 6% in the past year.

Global Payments, a leading worldwide provider of payment technology and software solutions, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 1.9%, on average. 

The Zacks Consensus Estimate for Global Payments’ current financial-year sales and EPS suggests growth of 1.7% and 5.8%, respectively, from the year-ago period. GPN has a Value Score of A. Shares of GPN have declined 28.9% in the past year.

BioMarin Pharmaceutical, a leading global rare disease biotechnology company, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 66.5%, on average.

The Zacks Consensus Estimate for BioMarin Pharmaceutical’s current financial-year sales and EPS implies growth of 11.1% and 2.3%, respectively, from the year-ago period. BMRN has a Value Score of A. Shares of BMRN have fallen 10.3% 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.

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