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Forget Profit, Bet on 4 Stocks With Increasing Cash Flows

Zacks Equity Research
Wall Street finished in the green reversing its five-day negative trend on Thursday following news that United States and China have ramped up their efforts to resolve lingering trade disputes

We are in one of the busiest weeks of the current-reporting cycle, and laying a wager on stocks based on profit numbers and surprises might seem appropriate right now for investors. However, during this earnings season and beyond, betting on stocks with a healthy cash level can be far more rewarding because even though profit is a company’s goal, cash is its lifeblood for existence and a measure of resiliency.

In fact, even a profit-making company can have a shortage of cash flows and face trouble in meeting its obligations if its profits are not channelized in the right direction to fund future growth. But a company with adequate cash flows can effectively tide over any market mayhem besides enjoying flexibility in decision making and chasing potential investments.

To find this efficiency, one needs to consider its net cash flow figure. While in any business cash moves in and out, it is net cash flow that explains how much money the company is actually generating.

If a company is experiencing a positive cash flow then it denotes an increase in its liquid assets, which gives it 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, a negative cash flow indicates a decline in the company’s liquidity, which in turn lowers its flexibility to support these moves.

However, having a positive cash flow merely does not secure a company’s future growth. To ride on the growth curve, a company must have its cash flow increasing because that indicates management’s efficiency in regulating its cash movements and less dependency on outside financing for running its business.

Therefore, keep yourself abreast with the following screen to bet on stocks with rising cash flows.

Screening Parameters:

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 eight stocks that qualified the screening:

Mexico-based Industrias Bachoco, S.A. de C.V. IBA is engaged in poultry production. It also produces and distributes eggs, swine and balanced feed. The company has a VGM Score of A.
Industrias Bachoco has experienced solid estimate revisions. The Zacks Consensus Estimate for full-year 2018 earnings has increased 38.5% in three months’ time.

Uruguay-based Arcos Dorados Holdings Inc. ARCO operates as a franchisee of McDonald's with its operations divided in Brazil; North Latin America division; South Latin America and the Caribbean division. The company has a VGM Score of B. It has a projected long-term growth rate of 19.4%. The stock has experienced positive estimate revisions, with the Zacks Consensus Estimate for 2018 earnings moving 2.7% north in two months’ time.

The Marcus Corporation MCS, headquartered in Milwaukee, WI, belongs to the lodging and entertainment industries and operates through movie theatres, hotels and resorts. The company has a VGM Score of B. The firm surpassed the Zacks Consensus Estimate in three of the last four quarters, with the average positive earnings surprise being 6.3%. For 2018 and 2019, the stock will likely witness earnings growth of 11% and 14%, respectively.

PRGX Global, Inc. PRGX, formerly PRG-Schultz International, Inc., provides audit, analytics, and advisory services in order to improve client financial performance. The company has a VGM Score of B. It has a projected long-term growth rate of 12.5%. The stock has experienced positive estimate revisions, with the Zacks Consensus Estimate for 2018 earnings moving 35.7% north in two months’ time.

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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.


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