A commonly used method to value stocks is discounted cash flow analysis. The basic idea is to estimate the present value of future cash flow from the business. While revenue growth is important, the bottom line is the cash flow potential that the business holds. Investors should look for cash-flow stocks that represent companies with robust free cash flow and the ability to increase cash flow on a sustained basis.
An important point to note is that blue-chip companies generally have robust cash flow. On the other hand, growth companies are focused on aggressive investments and cash flow is relatively low. However, if an investor can correctly identify a future cash-flow machine, returns from the stock can be multi-fold.
I have discussed a mix of blue-chip and emerging ideas from the perspective of cash flow potential from the business. I must add that healthy cash flow would also imply robust dividends and sustained value creation through share repurchase.
These are seven cash-flow stocks worth your attention now.
Apple (AAPL)
That Apple (NASDAQ:AAPL) trades at a valuation of almost $3 trillion is not a euphoria or a bubble. The valuation is a function of innovation and the cash flow potential. AAPL stock has a low dividend yield of 0.5%. However, I expect robust dividend growth in the next five years.
Apple reported operating cash flow of $62.5 billion for the first half of 2024, implying an annualized operating cash flow potential of $125 billion. Further, the technology company has a cash buffer of $160 billion.
Therefore, there is ample flexibility for dividends, share repurchases, and investment in innovation-driven growth. For the first half of 2024, the products business witnessed some contraction. However, the services segment, which includes the App Store, offset that weakness.
Even in the product segment, the wearable, home, and accessories businesses are likely to gain growth traction in global markets. Recently, the company unveiled a new AI-focused chip in its iPad Pro. With AI-powered enhancement in devices, I expect the products segment to deliver healthy growth in the coming quarters. Therefore, as the business grows, cash flows will continue to swell.
Alphabet (GOOG)
Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) is another technology stock that looks attractively valued, and the business is a cash flow machine. GOOG stock trades at a forward price-to-earnings ratio of 23.5x, which is attractive considering the impending growth backed by AI.
For Q1 2024, Alphabet reported revenue growth of 15% on a year-on-year basis to $80.5 billion. It’s worth noting that the Google Cloud business growth was 28% to $9.6 billion. Further, the technology giant reported operating cash flow of $23.5 billion for the quarter. The annualized operating cash flow potential is almost $100 billion.
This provides Alphabet with the flexibility to invest in AI-driven growth. At the same time, I expect a robust upside in dividends in the coming years. Coming back to AI, Alphabet is just getting started on that front. Last month, the company launched a beefed-up AI search and chatbot. Alphabet believes that it’s well-positioned for the “next wave of AI innovation.” I, therefore, expect healthy growth to be sustained coupled with a cash flow upside.
Lockheed Martin (LMT)
Global defense expenditures surged to $2.44 trillion in 2023 and there is no doubt that spending will continue to swell. Defense stocks are likely to benefit on the back of a robust order intake. Lockheed Martin (NYSE:LMT) is among the undervalued defense stocks to buy at a forward P/E of 17.9x. The defense stock also offers a healthy dividend yield of 2.7%.
As of the first quarter, Lockheed Martin reported an order backlog of $159 billion. This provides clear revenue and cash flow visibility. For 2024, the company guided for free cash flow of $6.2 billion (mid-range). This provides ample flexibility for dividend growth and continued share repurchases.
It’s also likely that sales growth will accelerate in the coming years and will have a positive impact on cash flows. There are two reasons to expect healthy sales growth. First, Lockheed increasingly pursued deals outside the U.S. with its allies. The geographic expansion will benefit the defense major.
Further, Lockheed is focused on next-generation defense technology, including hypersonic and next-generation interceptors. Its aggressive investment in research and development is likely to be a growth catalyst.
Chevron (CVX)
Chevron (NYSE:CVX) is an undervalued blue-chip stock from the oil and gas industry. In the last 12 months, CVX stock remained sideways with oil struggling to trend higher on the back of macroeconomic headwinds. I see the sideways move as a good opportunity to accumulate.
With multiple interest rate cuts likely in the next 12 to 18 months, I am bullish on oil. Chevron has an investment-grade balance sheet and high-quality assets with an attractive break-even point.
Chevron reported operating cash flow of $35.6 billion for 2023 and $6.8 billion in the first quarter of 2024. If oil trends higher, it’s likely that cash flow will be in the range of $35 billion to $40 billion for the year.
Cash flows will swell further with the likely completion of the acquisition of Hess (NYSE:HES). Therefore, even with aggressive capital investment plans, there will be ample flexibility for dividend growth and share repurchase.
Costco Wholesale (COST)
Costco Wholesale (NASDAQ:COST) is possibly the best pick among retail stocks considering the company’s growth trajectory. While a forward P/E of 51x looks slightly stretched, COST stock has always commanded a valuation premium as compared to peers. I would look at corrections to accumulate this retail behemoth.
For the third quarter of fiscal year 2024, Costco reported sales growth of 9.1% on a year-on-year basis to $57.39 billion. Comparable store sales growth was also healthy at 6.6%. With rate cuts impending, I expect consumption expenditures to accelerate, and Costco will benefit.
For the first nine months of fiscal 2024, the company reported operating cash flow of $8.3 billion. Cash flows have continued to swell, and I remain bullish, considering the top-line growth and continued upside in membership revenue.
As of Q1 2023, Costco had two warehouses in China. In the last quarter, the number of warehouses increased to seven. International expansion is likely to be another catalyst for growth and cash flow upside.
CrowdStrike Holdings (CRWD)
Cybersecurity stocks have been in the limelight considering the big addressable market. CrowdStrike Holdings (NASDAQ:CRWD) is an emerging cash-flow business that deserves a place in the portfolio. CRWD stock surged by 122% in the last 12 months. There was an intermediate correction, but the reversal was swift on the back of strong Q1 results.
For the first quarter, CrowdStrike reported stellar revenue growth of 33% on a year-on-year basis to $921 million. For the same period, CrowdStrike generated operating cash flow of $383 million and ended the quarter with a cash buffer of $3.7 billion. With annual operating cash flow visibility of almost $1.6 billion, CrowdStrike is an emerging cash-flow star.
The cybersecurity company reported annual recurring revenue of $3.65 billion as of April. Over the next five to seven years, CrowdStrike is targeting an annual recurring revenue of $10 billion. This provides an indication of the headroom for upside in revenue and cash flows. It’s, therefore, not surprising that CRWD stock has remained in a sharp uptrend.
Newmont Corporation (NEM)
Multiple factors globally are likely to ensure that gold remains in an uptrend. Some important reasons include geopolitical tensions, inflation, and the prospects of expansionary policies. Newmont Corporation (NYSE:NEM) is a blue-chip gold mining company worth holding for healthy dividends and capital gains.
As of 2023, Newmont reported 128 million ounces of gold reserves and 155 million ounces in resources. The gold miner has a leading portfolio of 10 Tier 1 assets. A strong asset base ensures a steady production upside beyond the current decade.
It’s also worth noting that Newmont has an investment-grade balance sheet. As of Q1 2024, the company reported a liquidity buffer of $7 billion. Last year, Newmont reported operating cash flow of $2.7 billion. With gold trending higher, it’s likely that operating cash flow will be more than $3.5 billion. This provides ample flexibility for dividend growth. At the same time, capital investments will remain aggressive backed by a strong balance sheet.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
