What are we looking for?
U.S. or Canadian listed stocks with strong cash flow and efficient operations.
With stock markets poised at lofty levels and many market watchers warning of possible pullbacks, defensive positions are sought after. In the event of an interest-rate hike or other market disturbance, companies that generate strong cash flows should be safer investments than those with more tenuous operations.
The screen
We will be using Recognia Strategy Builder to search for large U.S. or Canadian listed stocks (market cap of more than $5-billion) with strong cash flow levels and efficient business operations.
First, we will screen for stocks with a price to cash flow ratio of 14 or less. Companies with strong cash flows are more robust in the event of a market downturn. Price to cash flow is often a more relevant metric than price to earnings because it is harder for a company to manipulate.
Next, to ensure we select companies that are not hindered by high levels of debt (which could become onerous in the event of a market downturn) we will screen for stocks with a debt to equity ratio of 1.0 or less.
Last, to include stocks that have efficient operations and that should be poised to profit even under difficult economic conditions, we will include only companies with operating margins of 10 per cent or more. Operating margin is a measure of the profit a company makes on each dollar of revenue.
More about Recognia
Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions. Recognia's product suite provides actionable trading ideas including daily updates on 72,000 investment instruments and 800,000 options contracts. Recognia analyzes data from 85 exchanges worldwide providing technical and fundamental research on stocks, ETFs, indexes, forex, options and commodities.
What did we find?
Tax preparation firm H&R Block Inc., which ranks at No. 1 on our list, has a very strong price to cash flow ratio of just 9.7. The company also has the second-highest operating margin on our list at 24.9 per cent. Despite attractive fundamentals, the stock underperformed the S&P 500 index last year, rising just 8 per cent in the past year. On Feb. 4, the company reported third-quarter results that exceeded analyst expectations.
Canadian insurer Manulife Financial Corp. also makes our list with a price to cash flow ratio of 9.9. In mid-February the company reported fourth-quarter results that beat expectations on revenue but missed consensus earnings by 6 cents. Manulife's stock price is basically flat over the past year.
Chemical giant E.I. du Pont de Nemours & Co. is the largest company on our list with a market cap exceeding $71-billion (U.S.). DuPont stock has had a good run, up almost 16 per cent in the past 12 months. The company enjoys strong cash flow with a 12.3 price to cash flow ratio. In addition, DuPont also pays a 2.4-per-cent dividend.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.