The rapidly spreading novel coronavirus has rattled the stock market and significantly disrupted economic activities worldwide — denting demand, hurting supply chain, slowing down production activities and temporary closure of brick-and-mortar locations. An edgy stock market was further spooked by Saudi Arabia and Russia’s failure to reach a consensus over output cut, which resulted in the collapse of crude oil prices.
These provided enough ammunition to the bears in the market, which triggered a massive sell-off amid fears of an economic recession. We note that Dow Jones, S&P 500 and the Nasdaq have slid roughly 28.3%, 26.6% and 26%, respectively, in a month’s time.
Nonetheless, every possible measure is being taken to calm investors. The Federal Reserve in a bold move announced to inject up to $1.5 trillion into the financial system to provide cushion to the stock market and prevent unfolding of 2008 financial crisis like situation. Earlier, the Federal Reserve trimmed the benchmark interest rate by 0.5% to the range of 1-1.25%.
Now the big question is what strategy investors should apply. Is it time to get rid of stocks in your portfolio and wait for a conducive investing environment? Or is it time to spot those stocks that are trading cheap but fundamentally sound considering their long-term perspective?
Warren Buffett once said, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” With the stock market in doldrums, fear is widespread, so its time to be greedy.
Here’s an All-Weather Strategy
Value style is considered one of the best practices when it comes to picking stocks. There are different valuation metrics to determine a stock’s inherent strength but a random selection of a ratio cannot serve your purpose if you want a realistic assessment of a company’s financial position. For this, we would suggest Price to Cash Flow (or P/CF) ratio as one of the key metrics.
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 make 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 the financial health of a company.
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 expenses, reinvest in business, endure downturns and finally pay back its shareholders.
However, 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 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 its 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. 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 prospect.
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 five of the 18 stocks that qualified the screening:
Signet Jewelers Limited SIG is engaged in the retail sale of diamond jewelry, watches, and other products. It has a Zacks Rank #1 and an expected EPS growth rate of 8% for 3-5 years. You can see the complete list of today’s Zacks #1 Rank stocks here.
Macy’s, Inc. M sells apparel and accessories, cosmetics, home furnishings and other consumer goods. The company has an expected EPS growth rate of 12% for 3-5 years and a Zacks Rank #1. The company’s bottom line has outperformed the Zacks Consensus Estimate by 8.7% in the last reported quarter.
Citigroup Inc. C, which provides various financial products and services for consumers, corporations, governments, and institutions, carries a Zacks Rank #2. It has an expected EPS growth rate of 10.5% for 3-5 years and a trailing four-quarter positive earnings surprise of 3.3%, on average.
US Foods Holding Corp. USFD, which markets and distributes fresh, frozen, and dry food and non-food products to foodservice customers, carries a Zacks Rank #2. It has an expected EPS growth rate of 10% for 3-5 years. The company has a trailing four-quarter positive earnings surprise of 3.5%, on average.
Foundation Building Materials, Inc. FBM, which distributes building products in the United States and Canada, carries a Zacks Rank #2. It has an expected EPS growth rate of 17.8% for 3-5 years and a trailing four-quarter positive earnings surprise of 41.2%, on average.
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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.