Go to the Globe and Mail homepage

Jump to main navigationJump to main content

(Getty Images/iStockphoto)
(Getty Images/iStockphoto)

NUMBER CRUNCHER

Twenty cheap stocks with loads of free cash flow Add to ...

Craig McGee is a senior consultant at Morningstar Canada.

What are we looking for?

So far this year, it has been challenging to find strong performers from the broad U.S. market. The utilities sector has shown tremendous relative strength bouncing back by almost 13 per cent year-to-date, while the consumer discretionary and industrials sectors have lagged with negative returns so far in 2014. Over all, the S&P 500 has been basically flat.

With that in mind, I wanted to unearth some potentially beaten up and undervalued stocks that have also generated solid and growing free cash flow.

The screen

I scanned the CPMS U.S. database for the 20 stocks that met the following criteria:

  • Market cap greater than $1-billion (U.S.);
  • Positive free cash flow;
  • Free-cash-flow-to-debt ratio greater than 0.5;
  • Positive revision of the current year’s consensus earnings per share estimate over the past three months;
  • Positive year-over-year change in free cash flow (latest four quarters).

The stocks were then ranked using the best combination of the following metrics:

  • Free cash flow yield (four quarters’ free cash flow divided by latest price);
  • Free cash flow margin (four quarters’ free cash flow as a percentage of sales);
  • Free cash flow return on capital (four quarters’ free cash flow divided by the average debt plus equity over that period).

More about Morningstar

Morningstar Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers.

CPMS data cover more than 95 per cent of the investable North American stock market. With more than 110 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.

What we found

The screen yielded a list of stocks that have above-average free cash flow ratios. The average free cash flow yield for these stocks is 6.4 per cent versus 5.4 per cent for the S&P 500. The average free cash flow margin is 20.3 per cent versus 14.3 per cent for the index. The average free cash flow return on capital is 21.1 per cent, compared with 12.8 per cent for the index.

Many of these stocks have been hit hard this year, but with improving expectations and solid growth prospects, they could provide a decent margin of safety with the potential for a significant upside when the market pushes ahead.

As always, be sure to do further research before investing in any of the stocks listed here.

Companies with growing free cash flow

Follow us on Twitter: @GlobeInvestor

More Related to this Story

  • VRSN-Q
  • BCR-N
  • HLF-N
  • UTHR-Q
  • WBC-N
  • BRCD-Q
  • CSCO-Q
  • JCOM-Q
  • LMT-N
  • SYNT-Q
  • GNTX-Q
  • ANSS-Q
  • ALXN-Q
  • GD-N
  • OXY-N
  • ULTI-Q
  • ROG-N
  • HNI-N
  • JNPR-N
  • FLR-N
Live Discussion of VRSN on StockTwits
More Discussion on VRSN-Q
Live Discussion of BCR on StockTwits
More Discussion on BCR-N
Live Discussion of HLF on StockTwits
More Discussion on HLF-N
Live Discussion of UTHR on StockTwits
More Discussion on UTHR-Q
Live Discussion of WBC on StockTwits
More Discussion on WBC-N
Live Discussion of BRCD on StockTwits
More Discussion on BRCD-Q
Live Discussion of CSCO on StockTwits
More Discussion on CSCO-Q
Live Discussion of JCOM on StockTwits
More Discussion on JCOM-Q
Live Discussion of LMT on StockTwits
More Discussion on LMT-N
Live Discussion of SYNT on StockTwits
More Discussion on SYNT-Q
Live Discussion of GNTX on StockTwits
More Discussion on GNTX-Q
Live Discussion of ANSS on StockTwits
More Discussion on ANSS-Q
Live Discussion of ALXN on StockTwits
More Discussion on ALXN-Q
Live Discussion of GD on StockTwits
More Discussion on GD-N
Live Discussion of OXY on StockTwits
More Discussion on OXY-N
Live Discussion of ULTI on StockTwits
More Discussion on ULTI-Q
Live Discussion of ROG on StockTwits
More Discussion on ROG-N
Live Discussion of HNI on StockTwits
More Discussion on HNI-N
Live Discussion of JNPR on StockTwits
More Discussion on JNPR-N
Live Discussion of FLR on StockTwits
More Discussion on FLR-N

Topics:

In the know

Most popular video »

Highlights

More from The Globe and Mail

Most Popular Stories