This Will Cut Your Research Time in Half By Michael Salvatore, Editor, TradeSmith Daily Lately, I’ve been playing with a TradeSmith screener that helps you filter for what’s historically one of the greatest predictors of future market-beating returns… and could also limit your downside. In testing, the TradeSmith Research Lab found that buying stocks with this one special quality is key to capturing a tremendous amount of value – AND potential growth – all at once. These stocks aren’t easy to find on your own because they don’t conform to one specific niche. Some have a smaller market cap, and some are much larger. Some are exciting tech stories, while others are dull as dishwater. Many of them you’ve probably never heard of before, but all have one factor in common. It’s a mark of a highly effective, capital-efficient, shareholder-friendly business that you want to be a part of if you aim to sleep well at night. Today I want talk to you about free cash flow (FCF) yield, and why it could replace all the fundamental metrics you spend your precious time looking at now. I’ll also share one of the top FCF-yielding stocks in the market… and show you how to find more using this free new tool. The Ultimate Fundamental Metric Surveys of our readership have indicated that you’re most interested in buying a) growth stocks and b) dividend stocks – and we knew we had to find a way to serve both needs at once. Quickly, an FCF yield screener jumped to the top of our priority list. Let’s break it down. FCF is the amount of cash a company has left over after business expenses. The higher this number, the more money a company makes, which it can then use to pay down debt, invest in future growth, or return to shareholders by way of dividend payments. We’ve shown you before how important it is to consider a company’s cash situation when investing in stocks. But in the Research Lab, we took it a step further. By comparing FCF to the overall size of the company, you get an incredible picture of value as well. Most analysts compare FCF to a company’s market capitalization, but by comparing it instead to a company’s enterprise value – its market cap plus its debt and minus its cash – we’ve found you get a much clearer picture. This ratio, expressed as a percentage, immediately shows you how much FCF you get for every dollar you invest in a stock. I cannot overestimate how powerful this is. It’s hard enough knowing how much you’re getting for what you pay for any investment. There’s a million different ways to slice it. The FCF yield does more than that. It shows you how much you’re getting now… how likely it is that you’ll keep getting more and more in the future… and even how long it’ll take to earn your money back. (A stock with an FCF yield of 10% should theoretically take 10 years to “break even.”) But let’s not lean on theory. History holds the real proof. According to Bank of America Merrill Lynch, FCF yield was the #1 return-producing investment factor from 1986 to 2016, with an average annualized return of 18.2%. At the same time, companies with high FCF yield showed the smallest drawdowns, with less than 17% of that period showing a negative rolling 12-month return. With so much valuable info packed into one simple number, we can confidently call FCF yield The Ultimate Fundamental Metric. So, this naturally begs the question… Which stock has the highest FCF yield today? This Little-Known Company Is a Cash Machine As I write, the stock with the highest FCF yield in our database is global insurance company Everest Group (EG). Everest Group specializes in “reinsurance,” which is simply insurance for insurers. They use reinsurance policies to manage risks like natural disasters, in which a huge number of claims pour in – potentially more than the insurance company can cover all at once. Without reinsurance, those companies would need to maintain larger cash reserves… And premiums would probably be even bigger than they already are. One of the largest reinsurance providers is none other than Warren Buffett’s Berkshire Hathaway (BRK.B). And one of Buffett’s 2024 stock picks, Chubb (CB), also made the list, albeit it’s a much smaller player in this space than either Berkshire or Everest Global. At an FCF yield of 33%, EG makes enough free cash to cover roughly a third of its enterprise value. It also currently trades at just 5 times earnings… and pays out a dividend of 2.4%. EG currently earns a Strong Bullish rating in TradeSmith and has for the past year. That cash-machine business model contributes to a top-notch Business Quality Score of 91 out of 100. That’s way up there with companies like McDonald’s (MCD), which gets a 92, and Mastercard (MA), which gets a 99. Yet… And this is a major caveat we must consider… It has gone basically nowhere for the past year. EG’s been in a side-trend, according to our TradeSmith Smart Moving Average, since Jan. 30, 2024. As for our Health Indicator, EG also recently dipped into the Yellow Zone, as you can see in the three-year chart below. The Smart Moving Average is the dotted blue line: 
So, what gives? Didn’t I just say stocks with high FCF yield historically pay out great market-beating returns? That’s true… in the aggregate. But as much as we’d all love there to be a shortcut in investing, fundamentals are never the whole story. And one fundamental metric, even a strong one, will never be enough to guarantee a future winner. You have to match fundamentals to a stock’s momentum… its technical picture… and even investors’ and consumers’ attitudes toward it. So while it may significantly help if a stock has a high FCF yield, it’s certainly not everything. You need an edge that other investors aren’t considering. With that in mind, TradeSmith Platinum subscribers can access the FCF Yield screener any time through TradeSmith Analytics – along with a whole lot of other useful metrics to help you confirm a trade. (The numbers in the right column below indicate the stock’s FCF yield, and the arrows indicate its most recent quarterly move.) 
As just one example, HCI Group (HCI) – another insurance company offering similar policies to EG, but with a much more diversified business – boasts an FCF yield of 32.95%… and appears on our Trinity list, which filters for high-quality, cheap, uptrending stocks. HCI, unlike EG, is up about 25% in the past year, which is even outperforming the S&P 500, at 20%. That’s the kind of stock you really want to be looking for. We’ll keep seeking out great high-value, high-growth plays for you here in TradeSmith Daily and releasing new tools to make that easier and easier. Meantime, keep the nuances of investing in mind. Understanding strong fundamentals is important, but it takes a lot more than a single number to make for a blockbuster stock return. To your health and wealth, 
Michael Salvatore
Editor, TradeSmith Daily | 
0 Response to "This Will Cut Your Research Time in Half"
Post a Comment