Hedge Funds’ Favorite Stocks With Low Price-to-Cash-Flow Ratios

There are several valuation metrics an investor can use to gauge whether a stock is cheap or overvalued. While the most common among them is the price-to-earnings ratio, sophisticated investors  generally prefer the price-to-cash-flow (P/CF) ratio over the P/E ratio to estimate the fair value of a company. That’s because the P/CF has two major advantages over the P/E ratio. One, companies and managements can fiddle with their earnings numbers by using a host of accounting measures, but can’t do so with cash flows. And two, cash flow includes the non-cash expenses such as depreciation and amortization, which is excluded while calculating the net income. As a general rule, any stock that is trading under P/CF of 10 is considered attractively valued while those above 25 are considered overvalued. The S&P 500 currently has a P/CF ratio of around 12. In this post, we will take a look at five low price-to-cash-flow stocks that were popular among funds covered by us heading into the second quarter

Through extensive research, we determined that imitating some of the picks of hedge funds and other institutional investors can help generate market-beating returns over the long run. The key is to focus on the small-cap picks of these investors, since they are usually less followed by the broader market and are less price-efficient. Our backtests that covered the period between 1999 and 2012, showed that following the 15 most popular small-caps among hedge funds can help a retail investor beat the market by an average of 95 basis points per month (see more details here).

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#5 Carnival plc (ADR) (NYSE:CUK)

– Investors with long positions (as of March 31): 5

– Aggregate value of investors’ holdings (as of March 31): $65.41 million

Let’s start with Carnival plc (ADR) (NYSE:CUK), which currently trades at a price-to-cash-flow multiple of 8.2. During the first quarter, funds covered by us with long positions in Carnival plc (ADR) (NYSE:CUK) inched down by one, but the aggregate value of their holdings in it increased by 24.5%. Funds that initiated a stake in the company during that period included Peter Rathjens, Bruce Clarke and John Campbell‘s Arrowstreet Capital, which purchased slightly over 1.0 million shares of Carnival plc and was its largest shareholder among funds tracked by us at the end of March.  Shares of the cruise company performed remarkably well last year, rising over 20%. However, they have given up more than half of those gains in 2016 and currently trade down 14.36% year-to-date. On June 1, Carnival plc declared a quarterly dividend of $0.35 per share, which based on its current stock price translates into an annual dividend yield of 2.85%.

#4 Air Methods Corp (NASDAQ:AIRM)

– Investors with long positions (as of March 31): 17

– Aggregate value of investors’ holdings (as of March 31): $108.79 million

The ownership of Air Methods Corp (NASDAQ:AIRM) among funds covered by us declined by two and the aggregate value of their holdings in the company shrunk by nearly 33% during the first quarter. Notable investors that increased their stake in Air Methods Corp (NASDAQ:AIRM) during the first quarter included billionaire Jim Simons‘ Renaissance Capital, which brought its holding up by 174% to 467,400 shares. The stock of the air medical emergency transport services provider has been on a gradual decline from August 2014. However, since the company has improved its financials during that time, it currently trades at a price-to-cash-flow multiple of 8.0. For its fiscal 2016 first quarter, Air Methods Corp reported EPS of $0.50 on revenue of $269.40 million, compared to EPS of $0.36 on revenue of $238.29 million it had delivered in the same quarter last year.

#3 PharMerica Corporation (NYSE:PMC)

– Investors with long positions (as of March 31): 19

– Aggregate value of investors’ holdings (as of March 31): $39.36 million

Moving on, PharMerica Corporation (NYSE:PMC)’s stock plummeted in late-February after the company provided weak guidance for fiscal 2016 while declaring its fourth quarter results. This weak guidance might materialize into weak financial performance going forward, but based on last year’s cash flow the company is still trading at a cheap price-to-cash-flow ratio. Among the funds covered by Insider Monkey, the ownership of PharMerica Corporation (NYSE:PMC) declined by five and the aggregate value of their holdings in it slumped by over 605 during the first quarter. Billionaire Ken Griffin‘s Citadel Investment Group was one of the hedge funds that sold its entire stake in the company during that period. On June 7, analyst at Bank of America initiated their coverage on the stock with a ‘Buy’ rating.

#2 Dean Foods Co (NYSE:DF)

– Investors with long positions (as of March 31): 20

– Aggregate value of investors’ holdings (as of March 31): $200.18 million

Shares of Dean Foods Co (NYSE:DF) have been extremely volatile this year. Unlike most other stocks they started 2016 on a strong note, but declined significantly after a report published by Morgan Stanley analyzing Wal-Mart’s decision to in-source its milk processing called it a negative development for Dean Foods Co (NYSE:DF). Despite that decline Dean Foods Co’s stock is up 4% thus far in 2016 and currently trades at a price-to-cash-flow multiple of only 5.7. The number of hedge funds covered by us long Dean Foods Co (NYSE:DF) inched up by two and the aggregate value of their holdings in the company saw a marginal rise of 4.3% during the first quarter. Hedge funds that boosted their stake in Dean Foods Co during that period included Billionaire Israel Englander‘s Millennium Management, which upped its holding by 74% to 2.67 million shares and was the largest shareholder of the company among funds covered by us at the end of March.

#1 Tower International Inc (NYSE:TOWR)

– Investors with long positions (as of March 31): 21

– Aggregate value of investors’ holdings (as of March 31): $95.88 million

Tower International Inc (NYSE:TOWR) was the most popular low-price-to-cash-flow stock among funds tracked by us heading into the second quarter. During the first quarter, its ownership among funds increased by one and the aggregate value of their holdings in it swelled by 19.75%. Tower International Inc (NYSE:TOWR)’s stock is currently trading down by over 24% year-to-date largely due to the decline it has seen since the company came out with its first quarter numbers in April. While the financial numbers and guidance provided by the company were better than what analysts had expected, the announcement by Tower International that it won’t be selling its European operations didn’t bode well with the investors. Most analysts who track the stock believe that trading at a trailing price-to-earnings multiple of only 2.79 and a price-to-free-cash-flow multiple of only 4.5, the stock is extremely cheap right now. Billionaire David E. Shaw’s firm, D.E. Shaw upped its stake in the company by 31% to 251,624 shares during the first quarter.

Disclosure: None