TradeSmith just launched an exciting new screening tool that you should use in 2024.
This screener helps you filter for what's historically one of the greatest predictors of future market-beating returns… while also limiting your downside considerably.
Oh, it's also 100% free.
Got your attention? Good.
The TradeSmith Research Lab recently found that buying stocks with this one special quality is key to capturing a tremendous amount of value — AND potential growth — all at once. (As we discovered some weeks back, this is exactly the kind of thing you're looking for.)
These stocks aren't easy to find on your own because they don't conform to one specific niche. Some have a smaller market cap, and some are much larger. Some are exciting tech stories, while others are dull as dishwater.
Many of them you've probably never heard of before, but all have one factor in common.
It's a mark of a highly effective, capital-efficient, shareholder-friendly business that you want to be a part of if you aim to sleep well at night.
Today I want talk to you about free cash flow yield, and why it could replace all the fundamental metrics you spend your precious time looking at now.
I'll also share one of the top FCF-yielding stocks in the market… and show you how to find more using this free new tool.
The Ultimate Fundamental Metric
When we saw the results of the TradeSmith Research Lab survey, which indicated you're most interested in buying a) Growth stocks and b) Dividend stocks — we knew we had to find a way to serve both needs at once.
Quickly, a free cash flow yield screener jumped to the top of our priority list.
Let's break it down.
Free cash flow is the amount of cash a company has left over after business expenses. The higher this number, the more money a company makes, which it can then use to pay down debt, invest in future growth, or return to shareholders by way of dividend payments.
We've shown you before how important it is to consider a company's cash situation when investing in stocks. But in the Research Lab, we took it a step further.
By comparing free cash flow to the overall size of the company, you get an incredible picture of value as well.
Most analysts compare free cash flow to a company's market capitalization, but by comparing it instead to a company's enterprise value — its market cap minus its debt — we've found you get a much clearer picture.
This ratio, expressed as a percentage, immediately shows you how much free cash flow you get for every dollar you invest in a stock.
I cannot overestimate how powerful this is. It's hard enough knowing how much you're getting for what you pay for any investment. There's a million different ways to slice it.
The free cash flow yield does more than that. It shows you how much you're getting now… how likely it is that you'll keep getting more and more in the future… and even how long it'll take to earn your money back. (A stock with FCF yield of 10% should theoretically take 10 years to "break even.")
But let's not lean on theory. History holds the real proof.
According to Bank of America Merrill Lynch, free cash flow yield was the No. 1 return-producing investment factor from 1986 to 2016, with an average annualized return of 18.2%.
At the same time, companies with high free cash flow yield showed the smallest drawdowns, with less than 17% of that period showing a negative rolling 12-month return.
With so much valuable info packed into one simple number, we can confidently call free cash flow yield The Ultimate Fundamental Metric.
So, this naturally begs the question… which stock has the highest free cash flow yield today?
The answer will surprise you in more ways than one.
A Cheap, Hated Bank… That You Probably Shouldn't Buy
As I write, the stock with the highest free cash flow yield in our database is consumer financial services company Synchrony Financial (SYF).
Synchrony is primarily a consumer credit issuer, working with consumer brands to develop financing and in-store credit card products. It partners with everyone from Walgreen's and Sam's Club to Rakuten and Amazon. I've even used Synchrony's products myself for some unexpected pet care expenses back in 2020.
It also offers FDIC-insured savings products through its Synchrony Bank subsidiary.
At an FCF yield of 33.7%, SYF makes enough free cash to cover more than a third of its enterprise value. It also currently trades at just 7 times earnings… and pays out a dividend of 2.62%.
Yet… and this is a major caveat we must consider… it has gone basically nowhere since 2020.
SYF traded as low as $14 a share in the pandemic panic, rebounded to $50 in the 2021 bubble period, and these days trades at just over $38… exactly where it was in late 2019.
So, what gives? Didn't I just say stocks with high free cash flow yield historically pay out great market-beating returns?
That's true… in the aggregate. It's not true every single time.
But as much as we'd all love there to be a shortcut in investing, fundamentals are never the whole story. And one fundamental metric, even a strong one, will never be enough to guarantee a future winner.
You have to match fundamentals to a stock's momentum… its technical picture… and even investors' and consumers' attitudes towards it. So while it may significantly help if a stock has a high FCF yield, it's certainly not everything. You need an edge that other investors aren't considering.
With that in mind, you can access the FCF Yield screener any time through TradeSmith Analytics — along with a whole lot of other useful metrics to help you confirm a trade. (Keep in mind, this is a fresh release and we're still working on the visual layer a bit. The most important thing is the number, positive or negative, and not the color of that number.)
As just one example, Lennar Corp (LEN) appears on both the FCF Yield screener with a positive ratio of 15.64% — and the Trinity list, which filters for high-quality, cheap, up-trending stocks. LEN, unlike SYF, is a double over the same time frame.
That's the kind of stock you really want to be looking for.
We'll keep seeking out great high-value, high-growth plays for you here in TradeSmith Daily and releasing new tools to make that easier and easier.
Meantime, keep the nuances of investing in mind. Understanding strong fundamentals is important, but it takes a lot more than a single number to make for a blockbuster stock return.
To your health and wealth,
Michael Salvatore Editor, TradeSmith Daily
P.S. Hundreds of CEOs are about to make or break their company share prices in a matter of minutes.
Yes, earnings season is here again. And that means hundreds of big, quick trading gains ripe for the taking.
Now, trading earnings is notoriously difficult. Investors don't always react to reports the way you'd expect. That's why you need an edge that other investors don't have — just like we discussed today.
And Andy and Landon Swan, brothers and founders of our corporate partner LikeFolio, have exactly that edge. They use an A.I. model trained on an unusual dataset that gives them an early read on earnings reports.
Using this data made for big gains in 2023. In just the last earnings season, it predicted an 82% gain on DLTR in two days, 80% on DKS in one day, and 135% on CROCS in less than five.
TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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