Earnings can be easy to manipulate. But cash flow can provide a better indication of the health of an underlying business. Combining high free cash flow yield stocks with the fundamental criteria of Validea’s guru models, which are based on the strategies of Wall Street legends like Warren Buffett, Peter Lynch and Martin Zweig can help find fundamentally sound stocks that trade at discounted valuations.
What is Free Cash Flow Yield?
Free cash flow yield (FCF yield) is a financial metric that measures how much free cash flow a company generates relative to its market capitalization. It’s calculated by dividing a company’s free cash flow per share by its stock price. This metric is particularly valuable for investors because it shows how efficiently a company can generate cash for shareholders after accounting for all operating expenses and capital investments.
A high FCF yield often indicates that a company is generating substantial cash relative to its stock price, potentially signaling an undervalued stock. Unlike earnings, which can be manipulated through accounting practices, free cash flow provides a clearer picture of a company’s true financial health and ability to fund dividends, buybacks, and growth initiatives.
Why Combine FCF Yield with Guru Models?
Combining FCF yield analysis with Validea’s guru-based models creates a powerful framework for identifying quality value stocks. While a high FCF yield suggests potential undervaluation, the guru models add additional layers of analysis based on proven investment strategies. These models examine multiple aspects of a company’s financial health, growth prospects, and market position, helping to validate the investment case beyond just cash generation.
Let’s examine five stocks that combine attractive free cash flow yields with strong performance across various guru-based investment models:
1. CEIX – CONSOL Energy Inc CONSOL Energy stands out with a free cash flow yield of 17.42% and impressive scores across multiple value-oriented guru models. The company scores particularly well (94%) on the Acquirer’s Multiple strategy inspired by Tobias Carlisle, which focuses on identifying undervalued companies based on operating earnings relative to enterprise value. The coal producer also scores 93% on Peter Lynch’s P/E Growth model, with a favorable PEG ratio of 0.21, indicating significant undervaluation relative to its growth rate.
CONSOL’s strong performance across value metrics is complemented by its Price/Sales strategy score of 90%, based on Kenneth Fisher’s methodology. With a low P/S ratio of 1.39 and manageable debt levels, the company exhibits many characteristics of a classic value investment.
2. CRI – Carter’s Inc Children’s apparel retailer Carter’s boasts a free cash flow yield of 14.86% and demonstrates strong fundamentals across several guru models. The company particularly impresses on the Shareholder Yield strategy (95%), indicating strong commitment to returning capital to shareholders through dividends, buybacks, and debt reduction.
The company also scores well (91%) on Peter Lynch’s P/E Growth model due to its low PEG ratio of 0.24 and stable earnings history. Carter’s combination of strong cash generation and shareholder-friendly capital allocation makes it an attractive candidate for value investors.
3. LBRT – Liberty Energy Inc Liberty Energy shows a robust free cash flow yield of 11.95% and excels across multiple guru models. The company scores particularly well (94%) on the Acquirer’s Multiple strategy, with its low enterprise value relative to operating earnings suggesting significant undervaluation.
The energy services provider also scores 93% on Peter Lynch’s strategy, benefiting from its low PEG ratio and strong earnings growth. With a Price/Sales score of 90% and a low P/S ratio of 0.65, Liberty Energy demonstrates many characteristics sought by value-oriented investors.
4. MHO – M/I Homes Inc Homebuilder M/I Homes combines an attractive free cash flow yield of 11.87% with perfect scores on multiple guru models. The company achieves a 100% score on the Twin Momentum strategy, indicating strong fundamental and price momentum. It also scores highly (93%) on Lynch’s P/E Growth model, with its low PEG ratio of 0.24 suggesting undervaluation relative to growth.
The company’s strong performance across both value and momentum metrics suggests it may offer an attractive combination of value and growth characteristics.
5. PFBC – Preferred Bank Preferred Bank exhibits a solid free cash flow yield of 11.74% and achieves perfect scores on multiple guru models. The bank scores 100% on both the Patient Investor strategy (based on Warren Buffett’s approach) and the P/E Growth strategy (based on Peter Lynch’s methodology).
These high scores reflect the bank’s consistent earnings growth, strong returns on equity, and reasonable valuation metrics. The company’s ability to maintain stable profitability while generating substantial free cash flow makes it an attractive candidate for long-term investors.
Conclusion These five companies demonstrate that combining free cash flow yield analysis with guru-based investment models can identify potentially undervalued stocks with strong fundamental characteristics. While high free cash flow yields suggest these companies are generating substantial cash relative to their market values, their strong performance across various guru models provides additional validation of their investment merit.
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