The U.S. stock market retreated on Wednesday as investors booked profits and adopted a cautious approach after earlier gains in November. The pullback came as market participants evaluated fresh economic data and corporate earnings. Trading volumes were also lighter than usual ahead of the Thanksgiving holiday.

The S&P 500 dropped 0.38% to settle at 5,998.74, ending its seven-session winning streak. The Nasdaq Composite lost 0.6%, closing at 19,060.48, while the Dow Jones Industrial Average fell 138.25 points, or 0.31%, to 44,722.06.

Heading into December, investor focus is expected to shift toward year-end positioning and factors that might shape the Federal Reserve’s policy. In this environment, value stocks could draw attention as a compelling investment option. Often trading below their intrinsic value, they provide a margin of safety, which can be especially appealing amid market uncertainties.

When evaluating value stocks, one of the most effective valuation metrics is the Price to Cash Flow (P/CF) ratio. Companies like Tyson Foods, Inc. TSN, AXIS Capital Holdings Limited AXS, Pfizer Inc. PFE and General Motors Company GM 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

You must be wondering why we consider the P/CF valuation metric when the most widely used valuation metric is Price/Earnings (or P/E). An important factor 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. Then again, cash flow is quite reliable. Net cash flow unveils how much money a company generates and how effectively management is deploying the same.

A positive cash flow indicates an increase in the company’s liquid assets. This gives the company the means to settle debt, meet its expenses, reinvest in the business, endure downturns and finally undertake shareholder-friendly moves. Negative cash flow implies a decline in the company’s liquidity, which, in turn, lowers its flexibility to support these endeavors.

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 a Zacks Rank #1 or 2 offer the best upside potential.

Here are four of the 12 value stocks that qualified the screening:

Tyson Foods, one of the world’s largest food companies and a recognized leader in protein, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 57%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
 
The Zacks Consensus Estimate for Tyson Foods’ current financial year sales and earnings per share (EPS) suggests growth of 2% and 12.9%, respectively, from the year-ago period. TSN has a Value Score of A. Shares of TSN have surged 37.6% in the past year.

AXIS Capital Holdings, a global specialty underwriter and provider of insurance and reinsurance solutions, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 90.3%, on average.

The Zacks Consensus Estimate for AXIS Capital’s current financial year sales and EPS suggests growth of 7.4% and 10.6%, respectively, from the year-ago period. AXS has a Value Score of A. The stock has advanced 65.5% in the past year.

See the Zacks Earnings Calendar to stay ahead of market-making news.

Pfizer, which develops, manufactures, markets, distributes, and sells biopharmaceutical products, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 74.5%, on average.

The Zacks Consensus Estimate for Pfizer’s current financial year sales and EPS suggests growth of 8.3% and 58.2%, respectively, from the year-ago period. Pfizer has a Value Score of A. Shares of PFE have declined 15.2% in the past year.

General Motors, which designs, builds, and sells cars, trucks, crossovers, and automobile parts globally, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 17.5%, on average.

The Zacks Consensus Estimate for General Motors’ current financial year sales and EPS suggests growth of 4.8% and 34.8%, respectively, from the year-ago period. General Motors has a Value Score of A. Shares of GM have rallied 75.6% in the past year.

You can get the rest of the stock 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.

The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.

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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 are available at: https://www.zacks.com/performance.

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Pfizer Inc. (PFE) : Free Stock Analysis Report

Axis Capital Holdings Limited (AXS) : Free Stock Analysis Report

Tyson Foods, Inc. (TSN) : Free Stock Analysis Report

General Motors Company (GM) : Free Stock Analysis Report

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