4 Top Stocks to Buy for Value Investing After Fed Rate Cut

The Dow Jones Industrial Average inched up higher on Friday, setting a new record after a strong week, driven by the Federal Reserve's first rate cut in four years. The Dow rose by 38.16 points, or 0.09%, to close at 42,063.36. In contrast, the S&P 500 slipped 0.19% to 5,702.55, and the Nasdaq Composite fell 0.36% to finish at 17,948.32. This movement came after a midweek rally, during which the Dow surpassed the 42,000 mark and the S&P 500 hit a key milestone above 5,700. Despite Friday's slight pullbacks, all three major indexes posted weekly gains.

The Fed's decision to lower interest rates by 50 basis points spurred a buying spree on Thursday. However, markets steadied on Friday as investors stepped back from the prior day's surge. Going forward, the market will engage with a blend of economic indicators, including key releases, political developments and corporate earnings reports, all of which could trigger volatility. In this environment, value stocks stand out as a compelling investment option. Typically trading below their intrinsic value, these stocks offer a margin of safety during market fluctuations.

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 — Universal Health Services, Inc. UHS, Carriage Services, Inc. CSV, AXIS Capital Holdings Limited AXS and EnerSys ENS — that boast low P/CF ratios, making them strong contenders for value-seeking investors.

Price to Cash Flow Ratio 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, truly reflecting the financial health of a company.

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 in turn 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 11 low P/CF stocks that qualified the screening:

Universal Health Services, one of the nation's largest hospital companies, operating through its subsidiaries, acute care hospitals, behavioral health facilities and ambulatory centers, sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 14.6%, on average.

The Zacks Consensus Estimate for Universal Health Services' current financial year sales and earnings per share suggests growth of 9.8% and 51%, respectively, from the year-ago period. Universal Health Services has a Value Score of A. Shares of UHS have rallied 85.8% in the past year.

Carriage Services, a leading provider of funeral and cemetery services and merchandise in the United States, carries a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 17%, on average.

The Zacks Consensus Estimate for Carriage Services' current financial year sales and EPS suggests growth of 3.7% and 6.9%, respectively, from the year-ago period. CSV has a Value Score of B. Shares of CSV have risen 11.5% in the past year.

AXIS Capital Holdings, a global specialty underwriter and provider of insurance and reinsurance solutions, sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 94.6%, on average.

The Zacks Consensus Estimate for AXIS Capital's current financial year sales and EPS suggests growth of 7.2% and 8.7%, respectively, from the year-ago period. AXS has a Value Score of A. Shares of AXS have advanced 34.4% in the past year.

EnerSys, the global leader in stored energy solutions for industrial applications, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 1.5%, on average.

The Zacks Consensus Estimate for EnerSys' current financial year sales and EPS suggests growth of 4.7% and 7.1%, respectively, from the year-ago period. ENS has a Value Score of A. Shares of ENS have increased 6.3% in the past year.

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.

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