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'If you're going to dip a toe, start here': Citi says these 17 cash-rich stocks are perfect for traders seeking cheap opportunities in a coronavirus-hit market
But just because equities have been pulverized doesn't mean you should just scoop up issues indiscriminately. , thinks he knows exactly where to start the search — and he's putting a strong emphasis on quality, value, and leverage.
"As explained by Citi's Global Strategy team, companies with high FCF [free cash flow] typically have higher margins and lower capex, thereby maximizing profitability," he penned in a recent note to clients. "If you're going to dip a toe, start here." To Jullier, companies with high free cash flow have a leg up on the competition. The optionality that comes hand-in-hand with robust cash flows makes these firms especially enticing during times of turmoil. They can deploy their capital in a multitude of ways."Investors looking to buy in this wild market should start here given that this metric looks attractive as companies with high FCF yield have a proven ability to generate cash that can be used for M&A purposes, organic growth, buybacks, or dividend distributions to shareholders, especially if it is accompanied with lower balance sheet leverage," he said. But Jullier's analysis doesn't stop there. In total, he studies a confluence of four metrics to arrive at his recommendations."Screen for companies with a pre-tax FCF/EV yield of greater than UST+300bps. This filters for companies that have been able to maximize profitability.""Companies that rank in the bottom 60th percentile in terms of leverage, as measured by net debt/EBITDA, total debt/EV, and quick ratio. This would remove any names that have burdened themselves with too much leverage during the period of QE.""Screen for companies with ROIC/WACC of greater than 1. This gets rid of any companies that erode rather than create value for investors.""Companies with greater than 0.5 beta coefficient to the Pure Orthogonal Value Factor. This serves as a broad cut for value names in the S&P." With all of that under consideration, here are 17 stocks identified by Citi as having exceptional high pre-tax free cash flow yield. They're listed in increasing order.
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