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Look Beyond Profit, Bet on 5 Stocks With Rising Cash Flows

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Crunching profit numbers and evaluating surprises might be the preferred methods for scooping up big gains in the impending Q1 earnings season. However, looking beyond profits and assessing a company’s cash position can be far more rewarding because these indicate its true financial health.

In this regard, stocks like PDC Energy, Inc. (PDCE - Free Report) , Louisiana-Pacific Corporation (LPX - Free Report) , Academy Sports and Outdoors, Inc. (ASO - Free Report) , Encore Wire Corporation (WIRE - Free Report) and TimkenSteel Corporation (TMST - Free Report) are worth buying.

This is because although profit is a company’s goal, cash is the lifeblood for its existence, development and success, and indeed a measure of its resilience. In fact, even a profitable business can fail if its cash flow is uneven and eventually file for bankruptcy. Nevertheless, a company with a healthy cash position has the capability to effectively tide over any market mayhem and still be on its growth curve, besides enjoying flexibility to make decisions, chase potential investments and run its growth engine.

Furthermore, with uncertainties in the global economy, market disruptions and dislocations, as well as liquidity concerns resulting from geopolitical tensions or the pandemic, analyzing a company’s cash-generating efficiency holds more relevance in the current context.

To figure out this efficiency, one needs to consider a company’s net cash flow. While in any business cash moves in and out, it is net cash flow that explains how much money a company is actually generating.

If a company is experiencing a positive cash flow, it denotes an increase in its liquid assets, which gives it the means to meet debt obligations, shell out for expenses, reinvest in the business, endure downturns and finally return wealth to shareholders. On the other hand, a negative cash flow indicates a decline in the company’s liquidity, which in turn lowers its flexibility to support these moves.

However, having a positive cash flow merely does not secure a company’s future growth. To ride on the growth curve, a company must have its cash flow increasing because that indicates management’s efficiency in regulating its cash movements and less dependency on outside financing for running its business.

Therefore, keep yourself abreast with the following screen to bet on stocks with rising cash flows.

Screening Parameters:

To find stocks that have seen increasing cash flow over time, we ran the screen for those whose cash flow in the latest reported quarter was at least equal to or greater than the 5-year average cash flow per common share. This implies a positive trend and increasing cash over a period of time.

In addition to this we chose:

Zacks Rank 1: No matter whether market conditions are good or bad, stocks with a Zacks Rank #1 (Strong Buy) have a proven history of outperformance. You can see the complete list of today’s Zacks #1 Rank stocks here.

Average Broker Rating 1: This indicates that brokers are also highly hopeful about the company’s future performance.

Current Price greater than or equal to $5: This sieves out low-priced stocks.

VGM Score of B or better: This score is also of great assistance in selecting stocks. Importantly, this scoring system helps in picking winning stocks in their industry categories.

Here are our five picks out of the 14 stocks that qualified the screening:

PDC Energy, Inc., headquartered in Denver, CO, is an independent upstream operator engaged in the exploration, development and production of natural gas, crude oil and natural gas liquids.

The Zacks Consensus Estimate for PDC Energy’s 2022 earnings has moved 5.4% north to $15.39 over the past week. PDCE currently carries a VGM Score of A.

Louisiana-Pacific Corporation is a leading manufacturer of sustainable, quality engineered wood building materials, structural framing products as well as exterior siding for use in residential, industrial and light commercial construction.

The Zacks Consensus Estimate for Louisiana-Pacific’s 2022 earnings has been revised 4.7% upward to $13.02 per share in a week’s time. LPX currently has a VGM Score of A.

Academy Sports and Outdoors is a sporting goods and outdoor recreation retailer principally operating in the United States. The company's product assortment focuses on outdoor, apparel, footwear and sports & recreation.

The Zacks Consensus Estimate for Academy Sports and Outdoors’ fiscal 2022 earnings has been revised 14.5% upward in the past month. ASO carries a VGM Score of B.

Encore Wire is a low-cost manufacturer of copper electrical building wire and cable. The company is a significant supplier of both residential wire for interior electrical wiring in homes, apartments and manufactured housing, as well as building wire for electrical distribution in commercial and industrial buildings.

The Zacks Consensus Estimate for Encore Wire’s 2022 earnings has been revised upward to $10.74 from $9.76 in two months’ time. WIRE has a VGM Score of A.

TimkenSteel Corp. engages in manufacturing alloy steel, as well as carbon and micro-alloy steel. TMST provides air-melted alloy steel bars, tubes and precision components, as well as value-added services, including thermal treatment and machining. TimkenSteel’s customers include companies in the market sectors: oil & gas; automotive; industrial equipment; mining; construction; rail; aerospace and defense; heavy truck; agriculture, and power generation.

The Zacks Consensus Estimate for TimkenSteel’s 2022 earnings has moved up 7.6% over the past month. TMST currently has a VGM Score of A.

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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: https://www.zacks.com/performance.