The Standard & Poor's Investment Policy Committee, chaired by S&P chief investment strategist Sam Stovall, remains concerned about the health of the U.S. equity market. We asked Stovall where he would concentrate his stock picking these days. He said he would look for recommended issues with a low price-to-cash-flow ratio, since he believes those companies are able to afford share buybacks, make or increase dividend payments, or acquire other companies.
Stovall also said he would continue to avoid stocks in the financial services sector, since there is "still such a fog" surrounding those companies. S&P Equity Strategy advises an underweighting of financial services stocks.
This week, we screened for nonfinancial stocks ranked 5 STARS (strong buy) by S&P equity analysts with a price-to-cash-flow ratio of 7.5 or lower. For the purposes of this screen, we defined this ratio as "Recent closing stock price divided by net income from continuing operations plus depreciation, depletion, and amortization, divided by shares used to calculate earnings per common share."
While the "Stock Screen of the Week" is not tracked for performance, S&P's quantitative analysis team has back-tested certain investing principles on which many of the weekly screens are based. For example, "companies with strong cash flow relative to price generally outperform," says Richard Tortoriello, an S&P quantitative equity analyst, while "companies that have large cash positions in general underperform." In other words, cash flow can generally be thought of as a better predictor of outperformance than cash position.
Six stocks made the cut and are listed below. Tom Graves, an S&P equity analyst, notes that cash flow, in this screen, excludes capital expenditures. He suggests the price-to-cash flow ratio is a good starting point for identifying interesting stocks, but investors should look further into the companies' cash requirements, including capital expenditures.
•Abercrombie & Fitch (ANF)