In a world of hard-to-fathom innovation, hard-to-spot corporate power and hard-to-value assets, it can be tough for investors to know where to start. Sometimes, however, the smartest move is to return to the fundamentals of stockpicking and business.
When it comes to listed equities, a solid starting point in any investment case is the ability to generate cash. By focusing on companies with a proven capacity to generate free cash flow (FCF) and make a decent cash return on capital, an investor can cut a lot of market fat. By narrowing that focus further, to businesses that throw off more cash than they need to sustainably fund their operations, we start to highlight some of the strongest names in a market.
For more than a decade, our Cash Magic screen has applied these principles to UK shares. Two years ago, we began following a US version of the screen, to search for S&P 500 companies whose stated and forecast cash flow figures point to a good blend of business quality and cheapness. After debuting in April 2022, the US screen put in a resilient inaugural annual performance during a very rough period for American stocks. In the event, companies with resilient cash flows and high cash-based investment returns were one of the few shelters in 2022’s market storm.