By Marcus Tuck
Head of Research
The Super Investor
8 am – September 3, 2020
8 Stocks That Pass Our Filters
Quantitative Research
When looking for relatively low-risk equity investments, companies with strong balance sheets are a good place to start. If they happen to have a net cash position built up from retained earnings, even better. With no financial pressure on companies to service loans during business downturns, the risk of permanent loss of capital is greatly reduced.
High debt levels can be particularly dangerous for small cap companies or highly cyclical businesses experiencing recessed trading conditions. The fact that a company has been able to build up a net cash position over time is a sign of the company’s ability to generate free cash flow. Too many companies source cash from investors rather than from the profitability of their operations.
Using Bloomberg’s screening tool, we screened the ASX 300 for stocks that have the following characteristics:
1. Net cash position
2. Free cash flow yield above 2.5%
3. FY23 P/E ratio <= 25
4. FY23 EV/EBITDA <= 20
5. Forecast EPS CAGR >= 7% for next 3 years
6. Return on equity >= 15%
7. No FY21 EPS downgrade > 5% over last 3 months
The forward-looking measures use Bloomberg consensus forecasts. Out of the 300 stocks in the index, only eight currently pass through all of those filters. Those stocks can be seen in seen in the table below, ranked from highest to lowest forecast compound annual EPS growth.
Source: Bloomberg, The Super Investor
Five of those companies we have already covered in recent research reports, namely Jumbo Interactive, Codan, A2 Milk, Infomedia and Magellan.
The other three companies are resources companies, so their earnings are far more cyclical. Two are gold companies, Ramelius Resources and Silver Lake Resources. The other one is an iron ore company, Champion Iron. Analysts expect them to deliver strong earnings growth over the next three years. All three companies have high free cash flow yields and balance sheets with net cash positions. Market capitalization exceeds $1 billion in each case.
None of these companies is immune from the business cycle. But having a net cash position gives them a freedom that few companies enjoy, and also adds a margin of safety for investors.
Marcus Tuck
Head of Research
Disclosure: The author DOES own IFM shares.
Neither The Super Investor nor the author has received [or will receive] any benefit whatsoever from any party at all for the publication of this article.
Disclaimer: This report is produced for the general information of investors without any regard for any individual person’s needs or objectives. Indeed, this content may not be appropriate for you. Reliance on the information or data is at your own risk. Be sure to seek specific advice from your personal adviser before taking any action.
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