4 Value Stocks to Consider as Tech Volatility Weighs on Wall Street

The U.S. stock market remained subdued yesterday. While the Dow Jones Industrial Average gained 0.11% (+55.96 points) to 49,071.56, the broader market faced downside pressure. The S&P 500 slipped 0.13% to 6,969.01, while the tech-heavy Nasdaq Composite declined 0.72% to 23,685.12.

The technology sector set the tone for the session, with a sharp sell-off seen in Microsoft Corporation MSFT shares, after its earnings report reignited concerns about slower cloud growth. Some of this pressure was offset by strength in Meta, but overall sentiment remained cautious due to rising oil prices and geopolitical tensions. Amid this backdrop, value stocks present an appealing opportunity. 

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 — Harmony Biosciences Holdings, Inc. HRMY, Universal Health Services, Inc. UHS, Concentrix Corporation CNXC and Global Payments Inc. GPN — 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 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 nine value stocks that qualified the screening:

Harmony Biosciences, a pharmaceutical company, sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 7.2%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Harmony Biosciences’ current financial-year sales and earnings per share (EPS) indicates growth of 21.4% and 25.9%, respectively, from the year-ago period. HRMY has a Value Score of A. Shares of HRMY have lost 4.9% in the past year.

Universal Health Services, which through its subsidiaries 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. 

The Zacks Consensus Estimate for Universal Health Services’ current financial-year sales and EPS calls for growth of 9.7% and 31.3%, respectively, from the year-ago period. UHS has a Value Score of A. Shares of UHS have risen 6.1% in the past year.

Concentrix Corporation, a global technology and services leader providing customer experience solutions, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 1%, on average. 

The Zacks Consensus Estimate for Concentrix’s current financial-year sales and EPS suggests growth of 2.9% and 4.8%, respectively, from the year-ago period. CNXC has a Value Score of A. Shares of CNXC have plunged 26.1% 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 implies growth of 1.8% and 5.8%, respectively, from the year-ago period. GPN has a Value Score of A. Shares of GPN have plunged 36.8% 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.

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

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