Look Beyond Profits, Bet On 5 Stocks With Rising Cash Flows

In the impending second-quarter earnings season, one would find it easier to crunch profit numbers and evaluate surprises to scoop up big gains. But a company’s profit doesn’t necessarily channelize to the reserves to fund future growth. In fact, a profit making company can have a deficiency of cash flow and go bankrupt while meeting its obligations.

Therefore, to ensure that one is investing in the right stocks, a look at the company’s ability to produce cash is warranted. Cash gives a company the flexibility to make decisions, the means to make potential investments and the fuel to run its growth engine. Cash also shields a company from market turmoil.

In any business, money flows in and out, but net cash flow indicates how much money the company is actually generating or burning. Having positive cash flows indicates enhanced liquidity, giving the company more means for debt repayment, expenses, dividend payouts, stock buyback and finally reinvestment in business. On the other hand, a negative cash flow implies that a company’s liquid assets are decreasing, resulting in reduced flexibility to support these moves. So putting your hard earned money in stocks with less cash does not make any sense at all.

However, positive cash flows alone are not sufficient to predict a company’s future growth. If the cash flow is increasing over time, it indicates a company’s competency in growing. In fact, rising cash flow implies management’s efficiency in regulating its cash movements, reaping more money from its business, depending less on outside financing and finally its improving fundamentals.

So, while picking stocks this earnings season, don’t look at profits only. Make sure to look for stocks with dependable and increasing cash flows.

Screening Parameters:

To find out 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.

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 screens out the 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 five out of 10 stocks that made it through the screen:

Apogee Enterprises, Inc. (NASDAQ:APOG) is a leader in technologies involving the design and development of value-added glass products and services. The company is based in Minneapolis, MN. Presently, Apogee has a VGM score of “A”. Its expected EPS growth rate for 3 to 5 years currently stands at 10.0%.

AMN Healthcare Services Inc. (NYSE:AHS) is a San Diego, CA-based company that offers healthcare workforce solutions and staffing services in the U.S. The company has a VGM score of “B”. The company has a decent earnings surprise history, having surpassed estimates in each of the past four quarters, with an average surprise of 23.59%.

Liberty Interactive Group (NASDAQ:QVCA) , with a VGM score of “B”, owns interests in subsidiaries and other companies that are mainly engaged in the video and digital commerce industries. Its expected EPS growth rate for 3 to 5 years currently stands at 20.0%.

Post Holdings Inc. (NYSE:POST) is a manufacturer, marketer and distributor of branded ready-to-eat cereals in the United States and Canada. The company is based in St. Louis, MO. Post Holdings currently has a VGM score of “B”. The company has mostly recorded positive earnings surprises in the trailing four quarters.

Tokyo Electron Limited (OTC:TOELY) , with a VGM score of “B”, together with its subsidiaries, is engaged in the development, manufacturing and selling of semiconductor and flat panel display production equipment.

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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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LIBERTY M INT-A (QVCA): Free Stock Analysis Report

APOGEE ENTRPRS (APOG): Free Stock Analysis Report

AMN HLTHCR SVCS (AHS): Free Stock Analysis Report

POST HOLDINGS (POST): Free Stock Analysis Report

TOKYO ELECTRON (TOELY): Free Stock Analysis Report

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