We appear to be late in the economic-growth cycle that began in April 2020, with many experts seeing a good chance for recession within the next two years.
So what stocks might you want to hold in this environment? For late-cycle periods going back to 1990, the strongest value factor that BofA follows was the free-cash-flow-to-enterprise value ratio. That factor outperformed the broader market 4.2% in those periods.
So BofA put together a list of S&P 500 stocks with the highest FCF-EV ratios. Below is a list of the top 10 stocks, with the FCF-EV ratio expressed in percentage terms.
· eBay (EBAY), the online retailer. FCF-EV: 41%.
· Bio-Rad Laboratories (BIO), which makes products for life science research. FCF-EV: 32%.
· Moderna MRNA, (MRNA), a biotechnology company. FCF-EV: 27%.
· NRG Energy (NRG), a power company. FCF-EV: 22%.
· Pulte (PHM), a homebuilder. FCF-VE: 16%.
· Marathon Petroleum (MPC), an oil refiner. FCF-VE: 16%.
· D.R. Horton (DHI), a home builder. FCF-VE: 15%.
· HP (HPQ), a personal computer/printer developer. FCF-VE: 15%.
· DuPont de Nemours (DD), a chemicals company. FCF-VE: 15%.
· Paramount (PARA) , a media-entertainment company. FCF-VE: 14%.
Morningstar on eBay
Morningstar analyst Sean Dunlop assigns the company a narrow moat and puts fair value for the stock at $65, compared to a recent quote of $47.
“With divestitures of StubHub, eBay Classifieds, and Gmart largely in the rearview mirror, eBay's business looks remarkably similar to its genesis,” he wrote in a commentary
That’s a “customer-to-customer e-commerce platform connecting hundreds of millions of buyers and sellers worldwide, with an emphasis on non-new, seasoned good,” Dunlop said.
“The firm's strategic pivot strikes us as a competitive necessity, with unsuccessful forays into logistics and first-party inventory, and auxiliary services seeing the bulk of business-to-consumer sales migrate toward larger peers.”
Now, “the core eBay Marketplace business should have plenty of room to run, considering management's estimated $500 billion total addressable market for non-new, seasoned goods,” Dunlop said.
Morningstar on Bio-Rad Labs
Morningstar analyst Aaron Degagne assigns Bio-Rad a narrow moat and puts fair value at $524, compared to a recent quote of $528.
“Bio-Rad faced some headwinds in the first quarter from lower Covid sales and supply chain challenges, though growth declines were not as bad as feared and margin held up well,” Degagne wrote in a commentary.
“We have been impressed by Bio-Rad’s ability to expand and maintain margin growth over the past few years. The firm has posted over 10 full percentage points of operating margin expansion just since 2017.”
Further, “we think margin still has room to run, considering it remains behind peers, though we don’t think expansion at the same rate going forward is a realistic possibility.
