HomeMost PopularInvesting3 Top Ranked Stocks with Superior Free Cash Flow Yield

3 Top Ranked Stocks with Superior Free Cash Flow Yield

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When it comes to investing, one indicator stands out among the rest: Free Cash Flow (FCF) yield. This metric is a strong signal that a company is not only making money, but also using it wisely. A high FCF yield often indicates a company’s financial strength and potential for growth.

In this article, we will introduce you to three top-ranked stocks that boast impressive FCF yields, outstanding historical returns, and excellent Zacks Ranks. We will also explain why focusing on Free Cash Flow is one of the best ways to analyze a stock.

Why Free Cash Flow Yield?

1. Indication of Financial Health: Free Cash Flow is the cash generated by a company that is available to be distributed to investors after all planned capital expenditures have been made. A high FCF yield suggests that the company is undervalued.

2. Flexibility and Growth Potential: Companies with strong FCF have the flexibility to invest in growth opportunities without relying on external financing, such as expanding operations, entering new markets, or developing new products.

3. Enhanced Shareholder Returns: High FCF yield can lead to enhanced returns for shareholders, through share buybacks or dividend payments.

4. Debt Repayment: Companies with high FCF can pay down debt faster, reducing interest costs and strengthening their financial position.

5. Acquisition and Strategic Moves: Ample free cash flow allows companies to make strategic acquisitions, expand market presence, diversify portfolios, or eliminate competition.

6. Buffer Against Economic Downturns: Companies with high FCF yield are better equipped to weather economic downturns without relying on external financing.

7. Attractiveness to Investors: High FCF yield can be an indicator of undervaluation, making these companies attractive targets for investors.

8. Reduced Manipulation: FCF is a more reliable metric for investors, as it is less susceptible to manipulation compared to earnings.

Applied Industrial Technologies (AIT)

Applied Industrial Technologies is a leading industrial distributor that provides critical components, equipment, and value-added services to various industries. With a wide network of suppliers, AIT offers a broad product portfolio that includes bearings, power transmission components, fluid power components, and industrial supplies.

In addition to its impressive product offerings, Applied Industrial Technologies holds a Zacks Rank #1 (Strong Buy) rating, indicating upward trending earnings revisions. The stock has also delivered exceptional long-term returns, compounding at an annual rate of 16.2% over the past 25 years.

Notably, AIT has an FCF yield of 5.25%, surpassing the industry average of 3.5%. The company has maintained a history of positive free cash flow, growing its annual FCF by a CAGR of 12.5% annually.

Applied Materials (AMAT)

Applied Materials is a global leader in materials engineering solutions, playing a crucial role in the production of chips and advanced displays worldwide. The company modifies materials at atomic levels, making it a key player in the semiconductor and display industries.

With a Zacks Rank #1 (Strong Buy) rating, Applied Materials has seen consistently upward trending earnings revisions. The company has an FCF yield of nearly 6%, well above the industry average of 2.9%. Additionally, AMAT has shown impressive growth in its free cash flow, with an annual CAGR of 16.2%.

Vertex Pharmaceuticals (VRTX)

Vertex Pharmaceuticals is a global biotechnology company focused on the discovery, development, and commercialization of innovative medicines. Best known for its treatments for cystic fibrosis, Vertex has a strong pipeline of investigational drugs aimed at other serious and genetic diseases.

Over the past decade, Vertex Pharmaceuticals has experienced explosive sales growth, driving its positive free cash flow. The company has achieved a CAGR of 32% in sales growth. With an FCF yield of 4.2%, above the broad market average of 4.1%, Vertex demonstrates a commitment to generating free cash flow with significant growth potential.

Bottom Line

Free cash flow is a valuable and reliable metric for investors to analyze a stock’s financial strength and growth potential. By focusing on companies with superior free cash flow yields, investors can identify robust and steady investment opportunities.

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Vertex Pharmaceuticals Incorporated (VRTX) : Free Stock Analysis Report

Applied Industrial Technologies, Inc. (AIT) : Free Stock Analysis Report

Applied Materials, Inc. (AMAT) : Free Stock Analysis Report

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Disclaimer: The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Nasdaq, Inc.

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