September and October have historically been considered two of the worst months for the market, and this year was no different. Investors face a range of concerns ranging from the debt crisis to supply chain issues. In times of volatility, one strategy I like to use is to invest in “cash cow” stocks. These companies consistently produce stable cash flows.
It is named milk cows because of the similarity of cows that regularly produce milk. Businesses that produce stable cash flow are better equipped to navigate difficult markets or economic conditions than businesses with low cash flow. This is because they have excess money to use as they see fit. A good place to find cash cow stocks is to look at the Pacer US Cash Cows 100 ETF (Note A) (COWZ).
The ETF selects the Russell 1000 for the top 100 companies based on the performance of free cash flow. In addition, since early September, the ETF has outperformed the S&P 500. So I imported the ETF’s holdings into a screen to find stocks with a buy rating or higher in our POWR odds system. Some of the main actions included LKQ Corporation (LKQ), Boyd Gaming Corporation (BYD) and United States Steel Corporation (X), which is why I am highlighting them below.
LKQ Corporation (LKQ)
LKQ is one of the world’s leading distributors of non-OEM auto parts. Originally formed in 1998 as a consolidator of auto salvage operations in the United States, it has since significantly expanded its scope to include the distribution of new mechanical and collision parts, specialized automotive equipment and refurbished and recycled parts in Europe and North America.
The company benefited from strategic takeovers. For example, the acquisition of the buyout of Elite Electronics helps drive sales and profits for the company. In the first quarter of this year, LKQ acquired Greenlight, a Nebraska-based automotive mobile diagnostic services company. This should be integrated into its Elitek brand by the end of the year.
In addition, LKQ sees a recovery in demand in its North American and European segments and strength in its specialty segment. This trend is expected to continue due to strong demand for recreational vehicles and recreational vehicle parts. Based on this trend, management has revised its outlook for 2021. The company has also launched a series of cost reduction initiatives such as closing underperforming locations, consolidating delivery routes and reducing workforce.
This enabled it to consolidate its margins. Gross margin also benefited from favorable metal prices. LKQ has an overall rating of A, which translates into a strong buy rating in our POWR rating system. The company has a quality rating of B due to a strong balance sheet. The company had $ 329 million in cash last quarter, plus a free cash flow return of 8.2%.
LKQ also has a growth rating of B, as earnings per share rose 58.4% from last year. Moreover, analysts expect profits to rise 44.3% this year. We also provide Value, Momentum, Stability, and Sentiment ratings for LKQ, which you can find here.
LKQ is ranked # 3 in the B-rated auto parts industry. For more top stocks in this highly rated industry, Click here.
Click here to view our Automotive Industry Report for 2021
Boyd Gaming Corporation (BYD)
BYD is a multi-jurisdictional gaming company. The company operates wholly owned gaming entertainment properties including casinos, slots, table games and hotel rooms in Nevada, Illinois, Indiana, Iowa, Kansas , Louisiana, Mississippi, Missouri, Ohio and Pennsylvania. The company generates most of its revenue from its gaming activities.
The company has expanded its portfolio by strengthening its current operations and growing through capital investments as it relies on acquisitions to expand its brand presence. The company also made progress in its expansion into Northern California. He is currently working on Wilton Rancheria stations. The establishment is scheduled to open in the second half of 2022.
In addition, the management has expanded its online betting offerings due to the legalization of sports gambling. In 2018, the company partnered with MGM Resorts (MGM) to provide online and mobile gaming platforms such as sports betting, casino games and poker in areas with physical casino complexes and online licenses.
In the fourth quarter of last year, BYD rolled out a digital cashless wallet called BoydPay in Indiana and Ohio. Management expects to commission 21 properties by the end of this year, subject to regulatory approvals. The aim is to integrate the offer into its online products. BYD has an overall rating of A and a strong buy rating in our POWR rating system.
The company has an A quality rating due to a rock solid balance sheet. At the end of the most recent quarter, BYD had $ 335 million in cash compared to just $ 39 million in short-term debt. In addition, it has a yield on free cash of 8.6%. BYD also has a growth rating of A as analysts expect earnings to rise 3,153.30 for the year. For the rest of BYD’s ratings (Value, Momentum, Stability and Sentiment), Click here.
BYD is ranked # 1 in the Entertainment Industry – Casinos / Gaming. For more top ranked stocks in this industry, Click here.
Note that BYD is one of the few stocks currently selected in the Reitmeister Total Return portfolio. Learn more here.
United States Steel Company (X)
X operates primarily in the United States but also has steel production capacity in Slovakia. The company’s operating segments include flat-rolled, USSE and tubular, with most of the revenue coming from the flat-rolled segment. The segment includes integrated steel mills and business entities of X in North America involved in the production of slab, strip mill plate, plate and tin products.
The company has implemented an asset revitalization plan in its Flat Rolled division. This should improve its profitability and competitiveness. The company has also undertaken cost reduction initiatives such as realigning its operational footprint. The X is also expected to benefit from its acquisition of the remaining capital in Big River Steel.
This investment is expected to strengthen the company’s position in high-margin steel end markets such as automotive, energy and infrastructure and help increase margins this year. X also benefited from a rebound in US steel prices. This is due to growing demand in the automotive and construction sectors, supply shortages and high raw material costs.
These higher prices should help boost its margins. X has an overall rating of B, which translates into a buy rating in our POWR rating system. The company has a growth rating of B as sales are expected to increase 101.7% for the year, while profits are expected to increase 386.7%. X also has a value rating of B, which makes sense with a trailing P / E of 6.20 and a forward P / E of 4.56.
The company has a high cash level of $ 1.3 billion, which is a substantial increase from last quarter’s balance of $ 753 million. X’s free cash flow yield is also very high at 19.1%. To access all of X’s ratings, including Momentum, Stability, Sentiment, and Quality, Click here.
X is ranked # 26 in the A-ranked steel industry. For more top stocks in this top industry, Click here.
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This article was written by David Cohne, chief value strategist for StockNews.com. David has been helping investors find the most profitable stocks for over 20 years.
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LKQ shares were left unchanged on Monday after trading hours. Year-to-date, LKQ has gained 44.75%, compared to a 15.77% increase in the benchmark S&P 500 over the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. He is the chief value strategist for StockNews.com and the publisher of the POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services firms, hedge funds and online publications. David enjoys researching and writing about stocks and markets. It takes a fundamental quantitative approach in evaluating stocks for readers. Following…