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Fine-Tune Your Portfolio for 2016: 5 Cash-Rich Value Picks

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The last few months have been a roller-coaster ride for the stock market. Investors must be feeling skittish about the entire equity asset class, as the market continues to undulate like waves.

Low rates have definitely been a key catalyst that helped stock prices shoot up since they hit rock-bottom levels over six years back. They say it was the one of the slowest post-recession recoveries ever — but the stock market has actually more than tripled in value since then.

The famed QE pumped massive liquidity into the overall financial system. And lower-quality, higher-risk assets turned out to be arguably the biggest beneficiaries of the massive liquidity. Yes, the effect gradually weakened as monetary stimulus declined. But it’s still there.

Nothing sedates rationality like huge doses of effortless money. The last few years have surely been a thrilling experience, but now that the Fed has turned the tide, where do we really stand?

Now that the interest rate normalization cycle has taken off, we believe it would be sensible for equity investors to focus on “quality” and “value.”

Quality Check

We believe that in a potentially rising interest-rate environment, investors should seek these features in companies:

  • Attractive cash flow metrics: Needless to say, cash is the lifeblood of a business. But in this market, good cash flow comes with an increasingly high price. However, there are a few such companies that are still relatively undervalued.
  • Earnings stability: Look for companies that have shown consistency in surpassing earnings expectations over the last few quarters.
  • Value: In this market, it is prudent to overstep high-flying growth and look for stocks that have great value metrics but are still priced short of perfection.

O Value, Where Art Thou?

Finding value stocks is definitely a challenge for investors as valuations look stretched in almost all corners of the market after five years of bullishness. Traditional value metrics such as price-to-earnings (P/E) ratio are not quite adequate to unearth true value.

Here we usher in our style score system. Back-tested results show that stocks with Style Scores of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) or #2 (Buy) handily beat other stocks.

Our Value Style Score condenses all valuation metrics into one actionable score that helps investors steer clear of ‘value traps’ and identify stocks that are truly trading at a discount. These stocks have bright prospects with attractive valuations, serving a perfect opportunity for investors to jump in and ride the anticipated growth.

So we have screened for stocks with a top Value Score and a great Zacks Rank. These stocks also have an impressive Price/Cash Flow ratio, and have remarkable earnings beat stories in these volatile times.

5 Great Values

CONE Midstream Partners LP owns, operates, develops and acquires natural gas gathering and other midstream energy assets.

CONE Midstream has a P/CF ratio of just 4.26, and its current cash flow growth is an impressive 176.3%. Both figures trump those of the company’s peers. Moreover, the company’s sales are expected to grow 109.6% this year, solidifying our conviction that it is a great value pick that the market has not yet priced perfectly.

With a Zacks Rank #1, the company has beaten estimates in each of the last four trailing quarters, registering an impressive average surprise of over 17%.

AerCap Holdings N.V. (AER - Free Report) is an integrated global aviation company with a dominant market position in aircraft and engine leasing, trading and parts sales.

AerCap has a P/CF ratio of just 4.11, and its current cash flow growth is a whopping 239.6%. Both figures easily beat those of its peers, suggesting that it’s a cash-rich company, which is still trading under the radar. Moreover, AerCap’s sales are expected to grow 246.7% this year, lending further credence to our case.

Additionally, this Zacks Rank #2 company has beaten estimates consistently over the last four trailing quarters, registering a striking average surprise of over 9%.

Linn Energy, LLC is an independent oil and natural gas exploration and production company.

The company has a P/CF ratio of just 0.19, and its current cash flow growth is a remarkable 82.2%. Both figures trump those of its peers, placing it at the forefront of its industry in terms of future prospects. Moreover, Linn Energy’s sales are expected to grow 71.9% this year, giving further credibility to our buy case.

Moreover, the Zacks Rank #2 company has beaten earnings estimates constantly in the last four trailing quarters, with the beats averaging an astounding 1070.1%.

King Digital Entertainment plc  is an interactive entertainment company, produces and distributes digital games on multiple platforms

King Digital has a P/CF ratio of 8.76, and its current cash flow growth is 12.2%. Both figures trump those of the company’s peers. Moreover, the company’s sales are expected to grow 20% this year, solidifying our conviction that it is a great value pick that the market has not yet priced perfectly.

With a Zacks Rank #2, the company has beaten estimates in each of the last four trailing quarters, registering an impressive average surprise of over 26%.

Western Refining, Inc.  is an independent crude oil refiner and marketer of refined products.

The company has a P/CF ratio of just 5.55, while its current cash flow growth is a striking 46.9%. Both figures beat those of its peers, suggesting that it’s a cash-rich company, which is still trading under the radar. Moreover, Western Refining’s sales are expected to grow 50.2% this year, lending further weight to our buy case.

Additionally, this Zacks Rank #2 company has beaten estimates consistently over the last four trailing quarters, registering an average surprise of over 11.7%.

Get Going

Great cash flow, impressive sales growth and consistent earnings beats — what more could investors possibly ask for in a value stock? Add value to your portfolio and capitalize on the remarkable upside opportunities that these stocks offer.

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