U.S. equities finished Friday’s session with modest gains as investors digested a mix of central bank signals and looming trade policy concerns. The S&P 500 inched up 0.08% to settle at 5,667.56, while the Nasdaq Composite posted a stronger performance, climbing 0.52% to close at 17,784.05. The Dow Jones Industrial Average added 32.05 points, also gaining 0.08%, to finish at 41,985.35.

The uncertainty surrounding potential tariffs added a layer of caution to trading activity, as investors remain wary of the potential drag on economic momentum. Concerns about how such policies could impact an already moderating growth environment continued to weigh on sentiment. Meanwhile, the Federal Reserve maintained its benchmark interest rate in the 4.25-4.5% range, a level it has held since December.

In an environment marked by geopolitical uncertainty and shifting monetary policy, the markets continue to walk a tightrope. Against such a backdrop, value stocks stand out as a compelling investment option. 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. Companies like Fresenius Medical Care AG FMS, EnerSys ENS, General Motors Company GM and Itron, Inc. ITRI 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 (or P/CF) 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:

Fresenius Medical Care, the world's leading provider of products and services for individuals with renal diseases, sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 15.7%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Fresenius Medical’s current financial year sales and earnings per share (EPS) suggests growth of 0.6% and 22.9%, respectively, from the year-ago period. FMS has a Value Score of A. Shares of FMS have advanced 28.2% 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 2.2%, on average. 

The Zacks Consensus Estimate for EnerSys’ current financial year sales and EPS implies growth of 1% and 19.8%, respectively, from the year-ago period. ENS has a Value Score of A. Shares of ENS were up 3.9% in the past year.

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

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 15.8%, on average.

The Zacks Consensus Estimate for General Motors’ current financial year EPS calls for growth of 8.6% from the year-ago period. General Motors has a Value Score of A. Shares of GM have rallied 14.3% in the past year.

Itron, a technology, solutions and service company that provides end-to-end solutions to help manage energy, water and smart city operations, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 40.8%, on average. 

The Zacks Consensus Estimate for Itron’s current financial year sales indicates growth of 0.6% from the year-ago period. Itron has a Value Score of B. The stock has jumped 18.5% 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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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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Itron, Inc. (ITRI) : Free Stock Analysis Report

Fresenius Medical Care AG & Co. KGaA (FMS) : Free Stock Analysis Report

General Motors Company (GM) : Free Stock Analysis Report

Enersys (ENS) : Free Stock Analysis Report

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

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