Market Commentary: 19 Stocks with Ridiculous Cash Flows

When the economic winds of fortune change, the old saying goes that cash is king but maybe it should be cash flows are king. A company that can spit out enormous sums of cash with predicability may offer a safe haven at a perilous time. To find out what companies stand out, a little-known metric called CROCI is very useful.

What The Heck Is CROCI?

In this environment of higher interest rates relative to the past decade, what companies have such compelling fundamentals that make them attractive to buy on the dip?

Goldman Sachs releases a report with companies that consistently demonstrate CROCI higher than WACC. If that sounded like double dutch, here’s the plain english version. CROCI is Cash Return on Cash Invested. WACC is the weighted average cost of capital. Think of WACC as the rate a business pays to finance its assets.

Now here’s the kicker. A company can artificially goose all sorts of metrics by taking on debt. If I take out a $100 million loan to finance sales personnel, I can grow sales fast. But at what cost? Well, I need to pay off that debt some day. The more debt I take on the more I can accelerate sales. But what if I can produce attractive cash flows on the cash I already have without resorting to debt. That’s what the Goldman report reveals. And here are 19 stocks that check the box.

  • Apple
  • Analog Devices
  • Carrier Global
  • Caterpillar
  • Capri Holdings
  • Darling Ingredients
  • Deere
  • Elevance Health
  • Alphabet
  • Honeywell
  • Gartner
  • KBR
  • Korn Ferry
  • Altria 
  • Sapiens International
  • Thermo Fisher Scientific
  • Tapestry
  • United Health
  • Weatherford International

So What?

A list of stocks with good CROCI/WACC ratios, decent free cash flow yields and low net debt/EBITDA ratios, what am I supposed to do with that?

I thought you would never ask.

We took the next step and ran a discounted cash flow forecast on all 19 stocks so you could see precisely which ones are most undervalued and here’s what are results revealed:

  • Apple (11.1% overvalued)
  • Analog Devices (6.4% undervalued)
  • Carrier Global (28.1% undervalued)
  • Caterpillar (29.8% undervalued)
  • Capri Holdings (35.6% undervalued)
  • Darling Ingredients (46.9% undervalued)
  • Deere (12.6% undervalued)
  • Elevance Health (16.8% undervalued)
  • Alphabet (24.7% undervalued)
  • Honeywell (7.2% undervalued)
  • Gartner (7.8% undervalued)
  • KBR (2.9% undervalued)
  • Korn Ferry (46.5% undervalued)
  • Altria (35.8% undervalued)
  • Sapiens International (12.9% undervalued)
  • Thermo Fisher Scientific (1.5% undervalued)
  • Tapestry (29.3% undervalued)
  • United Health (7.5% undervalued)
  • Weatherford International (22.3% undervalued)

Of that list, Korn Ferry and Tapestry jumped out at us because in both cases management have share repurchases in place. Korn Ferry in particular has strong earnings and cash flows, as well as a 1.16% dividend. We also liked that, apart from 2021, the company has grown revenues in each of the last 10 years, including a 45.1% gain last year. Operating income has soared too, rising steadily from $70 million in 2013 to $482.9 million in 2022.