If we’re currently in the early innings of a bull market, as some analysts think, how should you invest?
There are big themes to consider: “work from home,” for example. And there are stand-out single stocks, like Amazon.com Inc. AMZN, -1.26%. But an approach that’s somewhere in the middle is factor investing — picking companies according to their performance qualities. Analysts at Ned Davis Research on Wednesday published a research paper on the factors to consider investing in now, and the stocks that fit those criteria.
Investors should select companies based on long-term sales growth, expected price momentum, cash position growth, and free cash flow/enterprise value, wrote Brian Sanborn and Dung Nguyen.
They explain: expected price momentum compares the loftiest analyst price target for the coming year to the most recent stock price. “It reflects the most optimistic expectation for a stock price’s growth over the next year,” they wrote. What’s more, after a market bottom, investors are naturally looking for companies with strong upside potential.
Cash position growth is a measure of balance sheet liquidity: the “12-month point change in cash plus short-term investments divided by total assets,” the analysts write. “A large amount of liquid assets relative to total assets indicates greater financial strength. However, too large of a ratio can indicate management’s failure to invest in the company’s future growth.”
Long-term sales growth measures trend-line sales growth from the previous five years. “Companies with higher values have been delivering top-line growth over multiple years,” the analysts note.
Finally, free cash flow/enterprise value is a measure of free cash flow (cash available for dividends, stock repurchases, debt reduction, reinvestment, and acquisitions), compared to how the companies is trading. “Those trading inexpensively relative to their free cash flow provide a higher margin of safety,” Sanborn and Nguyen write. “Free cash flow/enterprise value has been the best-performing strategy over time.”
The analysts identify about 40 stocks across various sectors that fit those criteria, with the most favored ones noted below.
|Company and ticker||Sector|
|UnitedHealth Group Inc. UNH, -3.29%||Health Care|
|Intel Corporation INTC, -1.85%||Information Technology|
|Bank of America Corporation BAC, -4.22%||Financials|
|Comcast Corporation CMCSA, -2.50%||Communication Services|
|AbbVie Inc. ABBV, -2.47%||Health Care|
|Lockheed Martin Corporation LMT, -3.47%||Industrials|
|CVS Health Corporation CVS, -2.68%||Health Care|
|Morgan Stanley MS, -2.24%||Financials|
|Source: Ned Davis Research; NDR Stock Screener|
It’s worth noting that different analysts have different views on when bull and bear market cycles start and end. According to Dow Jones Market Data, the Dow Jones Industrial Average DJIA, -3.03% entered its current bull market on March 26, the S&P 500 SPX, -2.91% entered its current bull market on April 8, and the Nasdaq Composite COMP, -2.57% entered its current bull market on April 14.