Follow The Cash

6/5/2017


When a financial pundit on TV or the guy who lives down the street says a company is growing fast, he usually means profit or sales growth. But while sales and profit growth are important, don't stop there.

We put a lot of value on trends related to operating cash flow, which filters out noncash expenses like depreciation. Most cash-flow metrics also account for changes in the value of inventory and accounts payable and receivable.

At their most basic level, companies attempt to generate more cash than they spend, and cash-flow metrics focus in tightly on that cash generation.

Revenue and profit growth still matter, and if a company is growing cash flow but not the other two, something may be rotten in Denmark. However, cash-flow growth serves as a useful check on growth in the more traditional operating-momentum statistics.

When possible, invest in companies growing sales, profits, and cash flows. If all three of those performance metrics are on the rise, the company's growth is more likely to be legitimate.

So, are companies growing their cash flows these days?

The answer depends on where you look.

In 2016, the S&P 1500 Index grew its operating cash flow 4%. However, most sectors within the index weren't even close to that average. The consumer-discretionary and technology sectors saw double-digit growth, while the energy sector's operating cash flow declined 31%.

Over longer periods of time, the growth divergence doesn't look quite so drastic. The S&P 1500 grew operating cash flow at an annualized rate of 8% over the last decade, and five of the eight featured sectors managed growth between 4% and 12%.

The two top sectors for 10-year growth of operating cash flow — consumer discretionary and technology — are among the top four for growth last year. Health care is third in growth over the last 10 years and fifth last year. On the flip side, telecom and energy companies have a ten-year history of below-market cash-flow growth.

When we screened for companies with strong growth in sales, profits, and operating cash flow over the last year, we ended up with a lot of technology stocks, plus health-care and consumer-discretionary names — all sectors with a strong history of growth.

The table below lists 10 A-rated stocks that managed growth of at least 15% in all three metrics over the last year, a feat managed by fewer than 10% of stocks in the S&P 1500.

GENUINE GROWERS
The 10 A-rated stocks below delivered at least 15% growth in sales, per-share profits, and operating cash flow over the last 12 months. Technology stocks dominate the list. Companies in bold are on our recommended lists.
Growth, Last 12 Months
------- Quadrix Scores -------
Company (Price; Ticker)
Oper.
Cash
Flow
(%)

Per-
Share
Profits
(%)

Sales
(%)
Momen-
tum
Value
Overall
Sector
Adobe Systems
($142; ADBE)
36
71
21
97
17
80
Technology
Alphabet
($987; GOOGL)
40
24
22
89
39
88
Technology
Applied Materials
($46; AMAT)
123
122
35
99
65
99
Technology
Celgene ($114; CELG)
48
80
21
78
56
85
Health care
Centene ($73; CNC)
259
31
84
97
95
100
Health care
Charles Schwab
($39; SCHW)
24
34
19
91
56
86
Financials
CommScope
($37; COMM)
41
180
19
36
78
65
Technology
Facebook ($151; FB)
84
128
53
88
32
72
Technology
Lam Research
($155; LRCX)
41
55
24
99
62
98
Technology
Priceline
($1,877; PCLN)
22
23
16
64
33
65
Cons. discret.
Note: Quadrix scores are percentile ranks, with 100 the best.

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