On Tuesday, Google announced stellar earnings.
Shares of the $1.6 trillion tech firm rose more than 4% the next day.
Tech stocks like Google are where the growth is. Consumer discretionary stocks have also done well.
In the past five years, these sectors have generated the greatest total returns. I believe you should own stocks in both sectors.
So, how do you find them? And how do you ensure you don’t pay too much?
In investing, you need to have a process.
It doesn’t have to be one, singular process, though. You can have a number of ways that you search for stocks.
I sure do!
I’m really just looking for ideas. Places to start.
If someone I trust recommends a name, I’ll look into it. But I find most of the names I recommend on my own.
Here’s an example of a screen that I believe applies today…
I’m a Big Fan of Companies That Generate Cash
I started with companies from the tech and consumer discretionary sectors.
I’m a big fan of companies that generate cash. I like to use cash as a metric for valuation.
So, I sought names whose free cash flow yield is greater today than it was in 2019.
I used 2019 because 2020 was a strange year. It wasn’t normal. The prior year was more “business as usual.”
Free cash flow equals a company’s operating cash flow minus capital expenditures. You get the “yield” part of free cash flow yield when you divide the result by market cap.
If a stock generates more cash relative to its price today than it did in 2019, that’s a good sign.
I also required that the company generate free cash flow of at least 5% of its market cap. That means the company generates more cash than it spends to grow.
You will note some of these steps are subjective. I chose 5% because I was looking for names that had some cushion. They generated enough cash … and then some.
Next, I searched for companies with average annual revenue growth of at least 15% over the past five years.
That isn’t easy to achieve. It means the company would at least double its sales over a five-year period.
I ran this screen on stocks with market caps less than $10 billion. The logic there is they can grow faster than larger names. There were only 24 names left at the end.
Of those, three stuck out:
Xperi Holding Corp. (Nasdaq: XPER) develops software for entertainment. Its sales are growing the fastest, and its free cash flow yield is the greatest of the three companies.
Cornerstone Building Brands Inc. (NYSE: CNR) serves a housing industry that can’t get enough product today.
And Box Inc. (NYSE: BOX) helps its clients store and share their data.
Like Google, all three of these names are great places to be today. Each of them could rise 50% or more over the next year.
Good Investing,
Editor, Profit Line
P.S. In Ian King’s Automatic Fortunes service, he has a five-pronged strategy to find winners.
One of Ian’s metrics is the company must have annual revenue growth of more than 20%. Period.
If a stock doesn’t meet even one of the metrics, he sets it to the side.
His results so far have been amazing. He generated a 919% gain on one half of one position (and 552% on the other half)! Ian’s process is crystal clear. He lays it out in this video.
I encourage you to check it out. You’ll be happy that you did. Ian’s brilliant.