Parking your hard-earned money in stocks based on top-line growth and increasing profit numbers might be a good option. But choosing stocks based on cash flows can be far more rewarding. This is because, cash indicates a company’s true financial health and holds the key for its existence, development and success.
In fact, even a profitable business can succumb to failure if its cash flow is uneven and eventually file bankruptcy. But a company with solid cash flow can effectively endure any market mayhem and still be on the growth curve because cash offers the flexibility to make decisions, the means to make potential investments and the fuel to run its growth engine. Moreover, cash indicates that profits are being channelized in the right direction.
To find out the efficiency of a company, one needs to consider its net cash flow. While, in any business, cash moves in and out, it is net cash flow that explains how much money the company is actually generating.
A positive cash flow indicates an increase in the company’s liquid assets, which provide the means to meet debt obligations, shell out for expenses, reinvest in business, endure downturns and finally return wealth to shareholders. On the other hand, negative cash flow indicates a decline in the company’s liquidity and in turn lowers its flexibility to support these moves.
However, positive cash flow alone is not sufficient to predict a company’s growth. A company can competently grow only when this positive cash flow is rising, because this improvement indicates management’s efficiency in regulating its cash movements and lesser dependency on external financing sources for running its business.
So, while picking stocks, look beyond profits and select companies with dependable and increasing cash flows.
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 individual industry categories.
Here are four out of nine stocks that qualified the screening:
BayerischeMotorenWerke AG (BAMXF - Free Report) is a multi-brand automobile manufacturer that focuses on the premium segments of the worldwide automobile and motorcycle markets. It has three brands: BMW, MINI and Rolls-Royce. The company is headquartered in Munich, Germany and has a VGM Score of A.
The stock has witnessed solid positive estimate revisions with the Zacks Consensus Estimate for 2017 earnings increasing 9.5% over the past 30 days.
Johnson Outdoors Inc. (JOUT - Free Report) is a leading global outdoor recreation company that designs, manufactures and markets a portfolio of winning, consumer-preferred brands across four categories: Watercraft, Marine Electronics, Diving and Outdoor Equipment. The company is headquartered in Racine, WI. It has a VGM Score of A.
The stock has witnessed positive estimate revisions with the Zacks Consensus Estimate for fiscal 2017 earnings increasing 23.2% over the past 30 days.
PFSweb, Inc. (PFSW - Free Report) , headquartered in Allen, TX, provides eCommerce and multichannel outsourcing solutions for global consumer brands, online retailers and brand manufacturers. This includes eCommerce technology, order management, customer care, global logistics and fulfillment services. The company has a VGM Score of A.
The stock has also experienced solid estimate revisions, reflecting analysts’ bullishness. In fact, the Zacks Consensus Estimate for 2017 earnings has increased 14.3% in a month’s time.
Tencent Holdings Limited (TCEHY - Free Report) , headquartered in Shenzhen, the People's Republic of China, is an Internet service portal. Tencent provides value-added Internet, mobile and telecom services and online advertising. The company has a VGM Score of B.
The company has a long-term expected earnings growth rate of 29.3%. Also, the stock has experienced positive estimate revisions with the Zacks Consensus Estimate for 2017 earnings moving 9.6% north in a month’s time.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back testing software.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »