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).

#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.