A dramatic change in the economy has been noticed over the past few months, owing to the coronavirus pandemic that also put an abrupt end to the longest bullish run in the America’s stock market history. In fact, the COVID-19 outbreak has claimed innumerable lives and brought economic activities to a standstill worldwide. There is hardly any industry that has been spared from the deadly impact of this virus. While the policy makers are walking the tight rope and undertaking every measure to support households, firms and financial markets, uncertainty looms large.
Economists have cautioned about sinking consumer confidence level, as this rare catastrophe has already started taking a toll on employment and household income
Well we still don’t know how long this battle with COVID-19 will be. But meanwhile policymakers are using every tool — slashing benchmark interest rate and announcing stimulus plan — to halt the economic meltdown. President Trump signed economic relief package aimed at assisting workers, small industries and distressed companies on the brink of extinction.
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
Investment in stocks made on diligent value analysis is usually considered one of the best practices. In value investing, investors pick stocks that are cheap but fundamentally sound. There are a number of ratios to identify value stocks but none alone can conclusively determine their inherent potential.
Each ratio helps an investor to understand a particular aspect of the company’s business. One such ratio, Price to Cash Flow (or P/CF), can work wonders in stock picking, if used prudently. 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.
You must be wondering why we are considering this when the most widely used valuation metric is Price/Earnings (or P/E). Well, 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 the financial health of a company.
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 is actually generating 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, shell out for its expenses, reinvest in its 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.
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 take into account 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 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 gives a more complete picture than 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 a Zacks Rank #1 or 2 offer the best upside potential.
Here are four of the six stocks that qualified the screening:
Canadian Solar Inc. CSIQ, which designs, develops, manufactures, and sells solar ingots, wafers, cells, modules, and other solar power products, carries a Zacks Rank #2. It has an expected EPS growth rate of 32% for 3-5 years. The company has a trailing four-quarter positive earnings surprise of 83.2%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
Biogen Inc. BIIB, which discovers, develops, manufactures, and delivers therapies for treating neurological and neurodegenerative diseases, has a Zacks Rank #2 and an expected EPS growth rate of 14% for 3-5 years. The company has a trailing four-quarter positive earnings surprise of 13.5%, on average.
Graphic Packaging Holding Company GPK provides paper-based packaging solutions to food, beverage, foodservice, and other consumer products companies. This Zacks Rank #2 company has an expected EPS growth rate of 25% for 3-5 years. The company has a trailing four-quarter positive earnings surprise of 9.6%, on average.
Vistra Energy Corp. VST, which is engaged in the electricity business, has an expected EPS growth rate of 11.9% for 3-5 years. This Zacks Rank #2 company has a trailing four-quarter positive earnings surprise of 5.6%, 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.
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Biogen Inc. (BIIB) : Free Stock Analysis Report
Canadian Solar Inc. (CSIQ) : Free Stock Analysis Report
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Vistra Energy Corp. (VST) : Free Stock Analysis Report
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