Analysts are constantly using quantitative screens to search the stock universe for what is the best performing category. In a recent report from Merrill Lynch’s, Savita Subramanian, the superb strategist gives readers a quantitative gold mine of data, and there is one subsector that has often been a good guide for investors to follow from a quant standpoint.
In the report, the Merrill Lynch team pulled the top 50 S&P 500 stocks that trade at the lowest price to cash flow. The definition for price to cash flow that was used by the team is month-end price divided by latest reported cash flow. Cash flow is defined as earnings post extraordinary items plus any depreciation.
Here are the five stocks that hit the Merrill Lynch screen.
QEP Resources Inc. (NYSE: QEP) comes in at the top spot on the Merrill Lynch list. The stock trades at an incredible low 1.89 price to cash flow. QEP Resources is a leading independent natural gas and crude oil exploration and production company focused in two major regions of the United States: the northern region (primarily the Rockies and the Williston Basin) and the southern region (primarily Texas and Louisiana). The shares closed Monday at $14.66.
Goodyear Tire & Rubber Co. (NASDAQ: GT) is a top consumer cyclical play and has benefited from the strong automobile replacement cycle. The company ranks number two on the Merrill Lynch top five and trades at 2.39 price to cash flow. It is one of the world’s largest tire companies. It employs approximately 67,000 people and manufactures its products in 50 facilities in 22 countries around the world. The shares closed Monday at $30.04.
Murphy Oil Corp. (NYSE: MUR) comes in at number three, trading at 2.59 price to cash flow. The company is a top is independent exploration and production company with a strong portfolio of global offshore and onshore assets delivering oil-weighted growth. Murphy produces oil and natural gas in the United States, Canada and Malaysia, and it conducts exploration activities worldwide. The shares closed trading on Monday at $36.28.
CenturyLink Inc. (NYSE: CTL) comes in at the fourth spot, trading at a very reasonable 3.24 price to cash flow metric. The company was also one of Merrill Lynch’s top high-yielding telecom stocks to buy. The company will report earnings in early August and could be poised for a solid quarter. The shares closed Monday at $30.50.
Micron Technology Inc. (NASDAQ: MU) has been absolutely mauled recently, and come in at number five on the list. The DRAM chip company trades at a 3.38 price to cash flow figure. Since January, the stock is down a massive 43%, and over 30% in just the past month. Many on Wall Street feel at these lower levels the company is a potential takeover candidate. The stock closed Monday at $18.89, down over 6%.
Price to cash flow can be a very good indicator on when a stock is truly cheap. Sometimes though, stocks like Micron can drop dramatically, and that lower price brings the ratio down. The question is can the cash flow stay at the same level?