HZNP 5 Stock Buys with Impressive Price-to-Cash Flow Ratios
April 19, 2016, 01:17:00 PM EDT By Zacks Equity Research, Zacks.com Comment
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"It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price." - Warren Buffet.
Investment in stocks made on diligent value analysis is usually considered one of the best practices. It is always safest to look for the intrinsic value of stocks that are backed by sound fundamentals.
For an effective value investing, we would suggest considering Price to Cash Flow (or P/CF) ratio as one of the key metrics.
This metric evaluates the market price of the stock relative to the amount of cash flow that the company is generating on a per-share basis. One of the important factors that gives P/CF an upper hand is that operating cash flow adds back non-cash charges such as depreciation and amortization to net income, reflecting the true financial health of the company.
However, an investment decision solely based on P/CF metric may not fetch you 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 give you event better results, as they eliminate the chance of entering into a value trap.
The Bargain Hunting Strategy
The concept is that you have to target those stocks that are trading below their fair value. These stocks are actually trading at a bargain price and could fetch higher returns in the future. Let's quickly go through the parameters for selecting true value stocks before running the screen.
P/CF less than or equal to X-Industry Median remains our first parameter.
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 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 its sales, lower the ratio the more attractive the stock.
PEG less than 1: The ratio is used to conclude 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, and a value of less than 1 indicates that stock is undervalued and 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 five of the 12 stocks that qualified the screening:
Ascena Retail Group Inc. (ASNA)
Kirkland's Inc. (KIRK)
HomeStreet, Inc. (HMST)
Hersha Hospitality Trust (HT)
Horizon Pharma plc (HZNP)
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: zacks.com
