Normally when the Federal Reserve (i.e. the Fed) makes an announcement, the market reacts predictably. That’s due, in large part, to the nature of what the Fed normally announces. Will interest rates go up, down, or remain unchanged? And for their part, the markets have a pretty good idea what the Fed will do before they do it.
But the Fed’s announcement of August 26 was a little different. They talked briefly about interest rates (they’re staying really low for a long time). But they were more concerned about inflation. Well, the Fed is always concerned about inflation, but this time they really mean it. Basic economics says that low-interest rates should spur inflation.
However, the market has been defying conventional wisdom and the Fed is not getting the inflation they want. So the Fed has basically said that they’re letting inflation go rogue. If it goes above their target 2% rate, so be it. The Fed is done trying to hit a target.
At first, the markets cheered the news. Not only was the Fed not taking away the punch bowl, but they were also going to keep the low rate liquidity going for a long time!
But after a little while to digest things, investors are realizing they have to be grown-ups about this. And now investors are considering how to rebalance their portfolios for the remainder of 2020.
I don’t know about them, but if I were you I would target companies that have a high free cash flow (FCF). Whether it’s your personal finances or in evaluating a stock, cash flow is your friend.
When a corporation has high FCF, they have more strong growth in good markets and more flexibility during when the economy is weaker.
As institutional investors come back into the market, it’s time for you to reposition your portfolio for whatever comes next.
Quick Links
- Apple
- Microsoft
- Walmart
- Verizon
- Pfizer
- Walgreen’s Boots Alliance
- Starbucks
#1 - Apple (NASDAQ:AAPL)
Apple (NASDAQ:AAPL) is a stock that investors love to hate. It might have to do with the company’s ecosystem that has an extremely loyal base of followers. Whenever the company releases a new product, there’s always much hand-wringing about how this will be the time when Apple disappoints. Yet they don’t.
And while much of the attention is placed on the company’s iconic iPhone (and rightfully so), Apple has made its Services division a point of emphasis, and it’s paying off. In the most recent quarter, Apple posted $13.2 billion in revenue, a 15% gain from the same quarter in 2019.
The company has a business model that allows them to focus on the design elements of their products. And that’s a strategy that’s been rewarded by consumers and investors.
But it can be expensive. And that’s where there’s much more to like about Apple than just its product base. The company generates plenty of free cash flow. In the trailing twelve months ending June 30, 2020, Apple had a free cash flow of $7.17 billion and a debt-to-equity ratio of 0.6. Those are fundamentals that any investor can appreciate.
And with Apple just executing a four-for-one stock split, investors are getting a chance to pick up shares at a more attractive price point.
About Apple
Apple Inc designs, manufactures, and markets smartphones, personal computers, tablets, wearables, and accessories worldwide. The company offers iPhone, a line of smartphones; Mac, a line of personal computers; iPad, a line of multi-purpose tablets; and wearables, home, and accessories comprising AirPods, Apple TV, Apple Watch, Beats products, and HomePod.
Read More - Current Price
- $254.49
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 24 Buy Ratings, 11 Hold Ratings, 2 Sell Ratings.
- Consensus Price Target
- $236.78 (7.0% Downside)
#2 - Microsoft (NASDAQ:MSFT)
Another popular tech stock on this list is Microsoft (NASDAQ:MSFT). During this pandemic, tech stocks have started to behave like blue-chip stocks. For example, despite beating estimates on the top and bottom lines, Microsoft stock has been pretty flat since the beginning of August.
But when you’re considering a stock such as Microsoft, you look beyond the short term. As many businesses continue to perfect a remote work model, Microsoft’s Teams, a competitor of Slack (NYSE:WORK), is benefiting. And the company is set to release a new version of its Xbox gaming console later this year.
Once again, there is a story beyond just the company’s profitable products and services. In the trailing twelve months ending in June, Microsoft had a free cash flow of $4.52 billion and a debt-to-equity ratio of just 0.57%.
Microsoft does pay a small dividend, but like Apple, you’re buying this stock for growth. And investors who bought MSFT stock five years ago have been rewarded with a 400% gain. That’s not a bad reward for buying and holding.
About Microsoft
Microsoft Corporation develops and supports software, services, devices and solutions worldwide. The Productivity and Business Processes segment offers office, exchange, SharePoint, Microsoft Teams, office 365 Security and Compliance, Microsoft viva, and Microsoft 365 copilot; and office consumer services, such as Microsoft 365 consumer subscriptions, Office licensed on-premises, and other office services.
Read More - Current Price
- $436.60
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 26 Buy Ratings, 2 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $508.46 (16.5% Upside)
#3 - Walmart (NYSE:WMT)
Say what you will about Walmart (NYSE:WMT), but the company has done more than just survive the pandemic. They are thriving and proving to be a relevant competitor to Amazon (NASDAQ:AMZN). Walmart embraced the e-commerce future, and that investment has paid off magnificently during the pandemic.
Walmart was already to go with curbside delivery, and the company is going to be jumping into home delivery with a new service, Walmart +. This service, which customers can access for $98 a year, or $12.95 per month will provide free delivery some times as fast as the same day.
It’s easy to see that Walmart is taking a direct shot at Amazon Prime. It’s a gamble, but one that the company can easily support with its solid balance sheet and fundamentals.
In the company’s last earnings report delivered in August, Walmart beat on both the top and bottom lines. The company posted earnings per share of $1.56 on revenue of $137.7 billion dollars. In the trailing twelve months ending in June, Walmart had $1.84 in free cash flow and a debt-to-equity ratio of 0.85%.
About Walmart
Walmart Inc engages in the operation of retail, wholesale, other units, and eCommerce worldwide. The company operates through three segments: Walmart U.S., Walmart International, and Sam's Club. It operates supercenters, supermarkets, hypermarkets, warehouse clubs, cash and carry stores, and discount stores under Walmart and Walmart Neighborhood Market brands; membership-only warehouse clubs; ecommerce websites, such as walmart.com.mx, walmart.ca, flipkart.com, PhonePe and other sites; and mobile commerce applications.
Read More - Current Price
- $92.24
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 29 Buy Ratings, 2 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $93.69 (1.6% Upside)
#4 - Verizon (NYSE:VZ)
Verizon (NYSE:VZ) has made it almost all the way back after its March selloff. The stock is within striking distance of turning positive for the year. Of course, the story for Verizon, as well as many wireless carriers, is 5G.
And Verizon’s business model is almost entirely wireless. Investors and analysts love the steady, recurring income stream. This is particularly important with the current uncertainty surrounding the economy. If consumers have to tighten their belts, they may have to choose which bills they have to pay. But the wireless bill will be one that is likely to always get paid.
In terms of free cash flow, Verizon posted $2.11 billion in the trailing twelve months ending in June. The company had a debt-to-equity ratio of 1.94%. Normally that could be a cause for concern, but that’s why investors love the free cash flow. Verizon should have options to manage that debt should the need arise.
About Verizon Communications
Verizon Communications Inc, through its subsidiaries, engages in the provision of communications, technology, information, and entertainment products and services to consumers, businesses, and governmental entities worldwide. It operates in two segments, Verizon Consumer Group (Consumer) and Verizon Business Group (Business).
Read More - Current Price
- $39.93
- Consensus Rating
- Hold
- Ratings Breakdown
- 8 Buy Ratings, 10 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $46.51 (16.5% Upside)
#5 - Pfizer (NYSE:PFE)
Pfizer (NYSE:PFE) is one of the leading names in the race for a Covid-19 vaccine. One of the reasons that Pfizer is considered to be a favorite is because, unlike some of the small biotech companies involved in Operation Warp Speed, Pfizer has a long, proven track record of products in the market.
Here’s a simple reality. Most of the names you’re reading about today will not be able to deliver a safe, effective vaccine. And when they can’t their companies will go back to being in relative anonymity. That’s not the case with Pfizer.
Late last year, Pfizer had a whopping 24 programs in Phase 3 of clinical trials. Undoubtedly the progress of some of these candidates may have been delayed due to the pandemic. But if just a few make it to market, it will be big news for Pfizer.
In the trailing twelve months ending in June of this year, Pfizer had $1.26 billion in free cash flow. The company’s debt-to-equity ratio is 0.78%. Plus among the company’s in this presentation, Pfizer sports one of the best dividends with a yield of just over 4% as of this writing.
About Pfizer
Pfizer Inc discovers, develops, manufactures, markets, distributes, and sells biopharmaceutical products in the United States, Europe, and internationally. The company offers medicines and vaccines in various therapeutic areas, including cardiovascular metabolic, migraine, and women's health under the Eliquis, Nurtec ODT/Vydura, Zavzpret, and the Premarin family brands; infectious diseases with unmet medical needs under the Prevnar family, Abrysvo, Nimenrix, FSME/IMMUN-TicoVac, and Trumenba brands; and COVID-19 prevention and treatment, and potential future mRNA and antiviral products under the Comirnaty and Paxlovid brands.
Read More - Current Price
- $26.36
- Consensus Rating
- Hold
- Ratings Breakdown
- 7 Buy Ratings, 9 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $32.14 (21.9% Upside)
#6 - Walgreen’s Boots Alliance (NASDAQ:WBA)
In addition to being a free cash flow machine, Walgreen’s (NASDAQ:WBA) does right by its shareholders by paying out a reliable dividend. Not only has the company paid out a dividend every year for 86 years, but it is also a Dividend Aristocrat, having increased its dividend for 43 years running.
However, while Walgreens is an exceptional choice for value investors, the same can’t be said of the stock for growth investors. In the last five years, the stock has underperformed the market and is down over 50% over that period.
But it’s becoming clear to some analysts that the stock is clearly oversold. And Walgreens exists in a sector that tends to hold up well in difficult economic conditions.
In the trailing twelve months ending in May of this year, Pfizer had $4.35 billion in free cash flow. The company’s debt-to-equity ratio is 1.96%. Like Verizon, this is higher than many analysts would like to see. However, it’s well covered by the company’s free cash flow. Walgreen’s also sports an attractive dividend with a yield that is over 5% as of this writing.
About Walgreens Boots Alliance
Walgreens Boots Alliance, Inc operates as a healthcare, pharmacy, and retail company in the United States, the United Kingdom, Germany, and internationally. It operates through three segments: U.S. Retail Pharmacy, International, and U.S. Healthcare. The U.S. Retail Pharmacy segment engages in operation of the retail drugstores, health and wellness services, specialty, and home delivery pharmacy services, which offers health and wellness, beauty, personal care and consumables, and general merchandise.
Read More - Current Price
- $9.55
- Consensus Rating
- Reduce
- Ratings Breakdown
- 2 Buy Ratings, 9 Hold Ratings, 4 Sell Ratings.
- Consensus Price Target
- $12.58 (31.7% Upside)
#7 - Starbucks (NASDAQ:SBUX)
Starbucks (NASDAQ:SBUX) is the one company on this list that actually has negative free cash flow for the time period ending in June 2020. However, I’m willing to give the company a mulligan because of the pandemic.
If you look at the first half of those 12 months, the quarters ending in September and December of 2019, the company was an FCF animal. But since the start of the year, it’s been a different story. And in the trailing twelve months ending in June, Starbuck’s posted a negative FCF of $449 million. The company’s debt-to-equity ratio was -2.98%.
But there’s a reason for that. In many cases, Starbucks wasn’t open for business in the United States or in China. People overlook the fact that Starbucks has been in China for over 20 years. And the company has over 3,500 locations in China. So the pandemic truly hit the company on two fronts.
However, that situation is long since past. And that means Starbucks should be turning that negative free cash flow into a positive number relatively soon. The “ber” months tend to be very good for Starbucks as they introduce a number of their specialty, limited-time offerings.
Plus, Starbucks pays a small but growing dividend. In fact, the company has increased its dividend in each of the last nine years.
About Starbucks
Starbucks Corporation, together with its subsidiaries, operates as a roaster, marketer, and retailer of coffee worldwide. The company operates through three segments: North America, International, and Channel Development. Its stores offer coffee and tea beverages, roasted whole beans and ground coffees, single serve products, and ready-to-drink beverages; and various food products, such as pastries, breakfast sandwiches, and lunch items.
Read More - Current Price
- $87.97
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 18 Buy Ratings, 8 Hold Ratings, 3 Sell Ratings.
- Consensus Price Target
- $103.77 (18.0% Upside)
Although some of these stocks are considered growth stocks, they are best for long-term investors. However, one of the things all these stocks have in common is that they all generate significant free cash flow.
Free cash flow is one of the best fundamental metrics to gauge the ability of a stock to weather times of uncertainty. And between now and the end of 2020, there will be a significant amount of uncertainty. There is less clarity surrounding the presidential election (and a likely delay in knowing who the winner will be). And the novel coronavirus will continue to be a story. As will any news about a potential vaccine.
And that’s just the news we know about. But that’s the thing about one of these companies. An investment in any one of them should give you the confidence to rest easy knowing your portfolio is secure regardless of what happens in the economy.
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