We are already well into the third-quarter reporting cycle and investors can be lured by big profits and solid earnings surprises. But even a profit-making company can have a dearth of cash flow and face bankruptcy if its profits are not channelized in the right direction.
Therefore, looking beyond profits to a company’s cash position will be far more rewarding because this indicates its true financial health. In fact, cash is the most essential factor for any company, the lifeblood for its existence, development and success. It is the fuel for a company’s growth and cushion amid downturn.
While, in any business, cash moves in and out, net cash flow explains how much money the company is actually making. If a company is experiencing a positive cash flow then it denotes an increase in its liquid assets, which gives it the means to meet debt obligations, shell out for expenses, reinvest in business, endure downturns and finally return wealth to shareholders. On the other hand, a negative cash flow indicates a decline in the company’s liquidity, which in turn lowers its flexibility to support these moves.
Yet, positive cash flow alone is not sufficient to predict a company’s future growth. A company can competently grow only when the positive cash flow is rising. Increasing cash flow indicates management’s efficiency in regulating its cash movements and less dependency on outside financing for running its business.
Therefore, in the midst of the current earnings season, brace yourself with the following screen to bet on stocks with increasing cash flows.
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. You can see the complete list of today’s Zacks #1 Rank stocks here.
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 sieves out 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 the winning stocks in their individual industry categories.
Here are four of the seven stocks that made it through the screen:
Hallador Energy Company HNRG, through its wholly owned subsidiary, Sunrise Coal, LLC, is engaged in the production of coal in the Illinois Basin for the electric power generation industry. The company is headquartered in Denver, CO and has a VGM score of A. It experienced a rise in estimates over the past seven days.
Argan, Inc. AGX, headquartered in Rockville, MD, through its subsidiaries, offers a full range of services to the power industry including engineering, procurement and construction, commissioning, operations management, maintenance, project development and consulting services. Also, the company provides telecommunications infrastructure services, integrated fabrication, construction and plant services through its subsidiaries.
Argan has a VGM score of A. It came up with an earnings surprise of 84.29% in the fiscal second quarter ended Jul 31, 2016, and its estimates for the current fiscal year moved north in the past two months.
China Shipping Development Company Limited CSDXY is engaged in providing coastal, ocean and Yangtze River cargo transportation, oil transportation, chartering, cargo agency and cargo transportation agency. It has a VGM score of A and its estimates experienced upward revision in the past two months.
Tokyo Electron Limited 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.
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