U.S. stocks for bargain hunters

Starbucks and US Airways have serious cash flow.

Ashley Redmond 2 August, 2013 | 1:00PM
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Ashley Redmond: For morningstar.ca I'm Ashley Redmond and I'm here with Melissa Kahnert. For this month’s edition of Stock Talk we're going to be searching the U.S. stock market, looking for companies that appear to be boosting operational efficiency; so more or less companies that are gushing cash flow.

Melissa Kahnert: As most of you know, cash is king, and cash can actually be the life blood of all companies. So, when we're looking at the U.S. market, although we've seen some tremendous recovery over the past year and a half, cash flow can help us identify opportunities of healthier companies that might be able to pay down debt faster, pay out dividends to shareholders or perhaps even invest in research and development.

So, over the long haul, a company with high cash flow means ones that are better set for any market opportunities and challenges that might set the way.

Redmond: So that sounds great, but as an investor how do you start by identifying these companies?

Kahnert: Well, I like to use the CPMS U.S. universe screening tool, which will allow us sift through 2,500 names in the U.S. market right now. To start, I think it's best to limit that list to the top companies with over a billion in market cap. This will help us screen out any smaller names that might be a bit riskier for investors, and then we might want to apply a few cash flow variables on top of that.

So, we'll just start out by maybe screening out high and increasing returns on invested capital, looking for high cash flow yields, and high cash flow margins, and maybe we'll take a look at our estimates and make sure that we see analysts over the past three months with a tendency to increase their earnings estimates for each of these companies.

Further to that, we'll take a look at our year-to-date total return numbers and just to add some diversification because I am a big advocate of that, we will screen out the industries, maximizing four in each group.

Redmond: Great. So what our results look like?

Kahnert: The results actually look fantastic. We actually see a myriad of companies on our list from all different sectors. We see some pharmaceutical names here, some retail names, including Starbucks, which is on this list and a personal favourite of mine. I know that I'm personally contributing to their cash flow on a daily basis. We see US Airways, consumer discretionary companies like McGraw Hill and a couple of tech companies including Synaptics.

Redmond: So, Melissa, this is a great list for bargain hunters.

Kahnert: Absolutely. But just like all of our lists in Stock Talk, it's just a screen meant to generate some ideas. It's always best for investors to check with their own philosophy and make sure that it matches their investment profile first.

Redmond: Great. And for most of you watching, you probably don't have access to CPMS. It's only available to institutional clients and investment advisors. However, you do have access to a ton of great tools on morningstar.ca. A great one to start with is the Stock Screener. You can find it on the Stocks page under Tools.

So, we've variety of filters from basics like stock sector to more detailed performance and profitability measures like revenue growth. You can select any number of these filters to narrow your search. Once filtered, the results table comes up and actually provides a side-by-side comparison of multiple performance data points, and again the Stock Screener can be found on the Stocks page under Tools.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Balchem Corp166.08 USD1.02
Cal-Maine Foods Inc63.14 USD-0.08
Cboe Global Markets Inc169.50 USD-0.16
Gap Inc23.97 USD-1.44Rating
Jazz Pharmaceuticals PLC105.59 USD-0.42Rating
Lear Corp118.78 USD0.96Rating
Methanex Corp51.08 USD1.29
Pegasystems Inc59.77 USD2.05Rating
S&P Global Inc478.32 USD1.08Rating
Starbucks Corp74.83 USD2.09Rating
Synaptics Inc91.02 USD1.77
Taro Pharmaceutical Industries Ltd42.08 USD0.00
Usana Health Sciences Inc45.31 USD1.18
VeriSign Inc177.76 USD1.66Rating
Westlake Corp146.65 USD0.36

About Author

Ashley Redmond

Ashley Redmond  Ashley Redmond is a Vancouver-based freelance writer.

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