WHAT ARE WE LOOKING FOR?
Stocks with lots of free cash flow in case the economy turns south.
MORE ABOUT TODAY'S SCREEN
We'll turn again to a stock screen report done by TD Securities Inc. last week. Yesterday, we looked at stocks rated "low" or "medium" risk by TD and ranked them by free cash flow. Today, we'll look at stocks TD rates "high" or "speculative" risk. TD rates all commodity stocks as either "speculative" or "high" risk, so this screen should surface the best commodity stocks for free cash flow.
The free cash flow yield is based on TD's 2010 forecasts. The firm defines free cash flow as operating cash flow after changes in non-cash working capital minus expected sustaining capital expenditures. "Sustaining capital expenditures" are those needed to maintain operations, as opposed to expand operations.
WHAT DID WE FIND OUT?
The screen produced a diversified list that includes many commodity stocks. TD warns that this free cash flow yield screen has limitations. For example, a company might have a high free cash flow yield, but may also be planning to spend a lot of its excess cash on expansion. "This means that looking at free cash flow yields alone could potentially dramatically overstate a given company's financial flexibility." Investors will need to do more research to examine each company's expansion plans.