Navigating the Current Market: Investing in Stocks with Positive Cashflow

Investing in Stocks with Positive Cashflow
Navigating the Current Market: Investing in Stocks with Positive Cashflow

I’ve got my nose in the air. I sense a bit of danger in the wind. Not for the economy — just in the stock market.

Momentum and sentiment feels weak. You won’t sense this if you take your cue off the index. It’s still around the highs.

But I do most of my hunting at the lower end of the market. Instinct tells me it’s a time to be slightly cautious.

It’s possible this changes soon. The market can be a fickle beast.

But the Fed played to form overnight. They cut rates. But that was priced into the market. It’s probably a ‘sell the news’ move right now…

There’s a bit of ballyhoo around market commentary about how ‘value investing’ may be beginning to trump ‘momentum’ and ‘growth’ strategies.

I’m not sure any of that is particularly helpful.

All I can say is that right now I feel a lot better about the stocks with positive cashflow than those that don’t.

You see…you can make very good money at times with stocks that don’t have any earnings.

That’s because the market will often reprice stocks up based off potential growth alone.

However, the downside with these looms large because there’s no cash coming in to support the share price.

Different strategies work at different times. The art of staying in the market over the long haul is to recognise this and stay flexible in your approach.

A way to navigate the current market

Right now, I’m looking for stocks with…

  • Cash coming in
  • Low expectations built into their price

This adds a defensive aspect to the position.

I’ve made the case for energy stocks on these grounds alone. You might be tired of hearing it from me.

But I’m not the only one. The Australian Financial Review cites investment house Allan Gray presenting on a similar theme yesterday.

Their basic point is that the outlook for the energy sector is so wildly pessimistic that it only needs to avoid catastrophe for you to make money.

They say there are three pillars to this line of thinking.

One is that the rollout of electric cars is bigger in perception than reality. Petrol cars will be here for a long time.

The second is that shale production in the US is marginal at the current price.

And a third is that reserves in place will be produced — and not left stranded, as many fear.

You can step in now and tap into this potential upside — with pretty limited downside.

That’s because there’s no growth premium built into prices.

Normally in the market you have to pay at least 10 times earnings for a stock at any given time. That metric can go crazy high at time.

Tech darling WiseTech [ASX:WTC] went over 100 times recently. I’ve seen P/Es higher than that, too.

That kind of play looks too risky right now.

I prefer sectors more beaten down…

Energy Stocks – Lots of cash due…and cheap!

For example, one my energy stocks is on track to start generating $50 million — yes, million with an ‘m’ — in free cash flow a year.

That’s money it can eventually pay out as a dividend, or buyback stock, or allocate to other projects. That’s a powerful position for any business to be in.

Its Price to Earnings ratio is under five.

And it comes with a juicy catalyst due in the next two months. It could potentially double off that alone.

We’ll check back in six months and see if I was right or not. Or sign up to my service and decide for yourself here.

You won’t hear about it anywhere else. There are no brokers that cover it.

It doesn’t need investment banks to raise money so they won’t put out some — *ahem* — complimentary coverage (in both senses of the word).

It doesn’t need to ‘sell’ its story to the websites that do coverage in exchange for cash.

Mostly it does one thing…produce oil with little fanfare!

I’m by no means adverse to buying momentum and pure growth plays when the times is right.

But, as above, I don’t think that’s the right move currently. Mr Market is not yet revealing his next favourite themes and desires.

Or, if he is, I’m missing the clues. That means we should tread a little carefully.

And that’s OK, too. If I’m missing the next hot spot, so be it.

I’d rather not run too big a risk right now.

There are worse things in life than a missed opportunity in the stock market. They come along too often to get all angsty over it.

Right now, I suggest scooping up depressed energy stocks and keeping a watchful eye on which way the market goes.

If no inspiration strikes today, the market will still be here tomorrow.


Callum Newman Signature

Callum Newman,
Editor, Profit Watch