Value style is considered one of the best practices when it comes to picking stocks. Value investing 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 (or P/CF) ratio is one of the key metrics. Corebridge Financial, Inc. CRBG, General Motors Company GM, Ford Motor Company F and Magna International Inc. MGA boast a low P/CF ratio.

This 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.

However, solely based on the P/CF metric, an investment decision may not fetch the desired results. To identify stocks 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.

The Bargain Hunting Strategy

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 stocks that qualified the screening:

Corebridge Financial, which provides retirement solutions and insurance products, sports a Zacks Rank #1 and has an expected EPS growth rate of 23.5% for three to five years. The company has a trailing four-quarter earnings surprise of 14.3%, on average.

The Zacks Consensus Estimate for Corebridge Financial’s current financial year sales and EPS suggests growth of 23% and 45.6%, respectively, from the year-ago period. Corebridge Financial has a Value Score of A. The stock has decreased 10.9% in the past year.

General Motors, which designs, builds, and sells cars, trucks, crossovers, and automobile parts globally, flaunts a Zacks Rank #1. It has an expected EPS growth rate of 9.9% for three to five years. The company has a trailing four-quarter earnings surprise of 22.6%, on average.

The Zacks Consensus Estimate for General Motors’ current financial year sales suggests growth of 9% from the year-ago period. General Motors has a Value Score of A. Shares of GM have declined 5.7% in the past year.

Ford Motor, which designs, manufactures, markets, and services a range of trucks, cars, sport utility vehicles, electrified vehicles, and Lincoln luxury vehicles globally, carries a Zacks Rank #2 and has an expected EPS growth rate of 7% for three to five years. The company has a trailing four-quarter earnings surprise of 20.1%, on average.

The Zacks Consensus Estimate for Ford Motor’s current financial year sales and EPS suggests growth of 6.6% and 9%, respectively, from the year-ago period. Ford Motor has a Value Score of A. The stock has decreased 19.6% in the past year.

Magna International, one of the world’s largest suppliers in the automotive space, carries a Zacks Rank #2. It has an expected EPS growth rate of 20.4% for three to five years. The company delivered an earnings surprise of 20% in the last reported quarter.

The Zacks Consensus Estimate for Magna International’s current financial year sales and EPS suggests growth of 12.3% and 28.1%, respectively, from the year-ago period. Magna International has a Value Score of A. Shares of MGA have declined 8.3% in the past year.
Ford Motor Company (F): Free Stock Analysis Report

Magna International Inc. (MGA): Free Stock Analysis Report

General Motors Company (GM): Free Stock Analysis Report

Corebridge Financial, Inc. (CRBG): Free Stock Analysis Report

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