It’s never easy to pick stocks to buy for the second half of a calendar year. That’s especially true when the markets are hotter than a pistol — which they are in 2021.
As of July 14, the S&P 500 was up 18.31% year-to-date (YTD). That’s an annualized return of almost 34%. Since 1928, the index has done better on just six occasions, the last being in 1995.
Ultimately, I want to give suggestions that can make money for readers over the long haul and not just the remaining five months of this year.
With that in mind, a strategy based on 10 momentum stocks could backfire if the markets cool off in the second half. But on the other hand, if I go with 10 tried-and-true stocks and the markets stay hot, you’re likely to underperform relative to the index.
Therefore, I’ll try to have my cake and eat it too. These 10 stocks have high free cash flow (FCF) yields and are trading at or near the index’s YTD return:
- BHP Group (NYSE:BHP)
- ViacomCBS (NASDAQ:VIAC)
- Columbia Sportswear (NASDAQ:COLM)
- Nomad Foods (NYSE:NOMD)
- TechnipFMC (NYSE:FTI)
- Orix Corporation (NYSE:IX)
- Jazz Pharmaceuticals (NASDAQ:JAZZ)
- Masonite International (NYSE:DOOR)
- Paramount Group (NYSE:PGRE)
- Genpact (NYSE:G)
Stocks to Buy: BHP Group (BHP)
As with all my stock galleries, I try to provide sector diversification. I would like to load up on stocks in industries I enjoy, such as the consumer cyclical or consumer defensive sectors. But as my dad used to say — and he was generally an optimist — “Life is to be endured.” So, I endure by selecting a materials stock.
BHP Group is the world’s largest mining conglomerate. Based in Australia, it has a YTD return of 15% and an FCF yield of 5.6%. As for BHP stock’s rating, of the 15 analysts that cover it, nine rate it as either a buy or overweight. Only two rate it as underweight or an outright sell.
For the trailing 12 months (TTM) ended March 31, BHP had $46.3 billion in revenue. That’s higher than it’s been at any point in the past three years. Over the same period, the company has seen $16.6 billion in operating income.
I consider companies with FCF yields between 4% and 8% to be very attractive long-term investments.
The media conglomerate’s stock has gathered speed in the past three months. In that time, VIAC shares have risen 4% in response to rumors that the company may be the subject of a bid by Comcast (NASDAQ:CMCSA).
The main attraction for Comcast would be ViacomCBS’ Paramount+ streaming service. The telecommunications company has its own streaming unit, Peacock, as part of its NBCUniversal media conglomerate. Combining both services would put Comcast in a good position to capture the coveted number-three spot in the lucrative streaming industry.
Paramount+ is adding several items to its streaming repertoire this summer. Most notably, the service will stream hundreds of live soccer-related events like the Men’s Concacaf World Cup Qualifiers.
Tom Ryan, president and chief executive officer of ViacomCBS Streaming, said, “The breadth and depth of premium feature films and exclusive series coming to the service further strengthens our position in the market as a premium entertainment destination and, by offering this compelling content portfolio at an all-new low cost, makes us even more accessible to a wide consumer audience.”
When you consider the boost Disney (NYSE:DIS) has gotten from Disney+, ViacomCBS executives have good reason to be excited.
Stocks to Buy: Columbia Sportswear (COLM)
On average, the 12 analysts covering COLM stock rate it overweight with a 12-month target price of $127. That’s 28% upside at current prices.
In April, COLM stock hit its all-time high of $114.98. Up nearly 25% over the past year, CEO Timothy Boyle must be very happy with its run of late. Boyle’s shares are now worth $2.3 billion.
The board of directors could use a few more women — of the nine members, just two are female. It could also benefit from a few younger members, as the average director’s age is 68. But there’s no doubt that they are a group of very talented individuals.
Normally I’m not a fan of boards that are particularly ancient, especially when it comes to consumer-facing products such as apparel and footwear. But in Columbia’s case, the proof is in the pudding.
The company has managed to produce returns for shareholders in recent years. I see good things happening in the long term for investors in COLM stock.
Nomad Foods (NOMD)
If you haven’t heard of Nomad, it’s the largest frozen food company in Europe. In the U.S., the company is the third-largest of its kind, with Nestle (OTCMKTS:NSRGY) and Conagra Brands (NYSE:CAG) in the top two spots.
In March, Nomad announced that it will acquire Fortenova’s frozen food business. The company’s Ledo and Frikom brands are well-known to consumers in Central and Eastern Europe. Nomad paid 615 million Euros ($726 million) for the frozen food group. That’s less than 10 times the group’s adjusted earnings before interest, taxes, depreciation and amortization (EBITDA).
Nomad’s Green Cuisine brand is Europe’s fastest-growing frozen meat-free brand. In 2020, its retail sales grew by 299%. That’s almost five times faster than Beyond Meat (NASDAQ:BYND), which saw 65% growth in the same timeframe.
As for the analysts’ perspective, 10 cover NOMD stock, with nine rating it a buy and one rating it overweight. They list a median target price of $28.66. I think we’ll see a bunch of revisions for this stock in the next few months.
Nomad’s TTM FCF is $410.6 million. Based on a market cap of $4.9 billion, it has an FCF yield of 8.4%. I consider that to be value territory.
Stocks to Buy: TechnipFMC (FTI)
If we were talking about weaknesses in stock coverage, the energy sector would be at the top of the list. I don’t see the point in covering businesses that probably won’t exist in a decade or two.
TechnipFMC was created during the January 2017 merger of FMC Technologies and Technip. The combination created a global leader in subsea and surface technologies. TechnipFMC also provides services to oil and gas exploration and production companies.
In the first quarter of 2021, the company’s subsea operations generated revenue of $1.39 billion, an 11% increase from last year. TechnipFMC’s subsea operations account for 85% of its overall revenue and has a backlog of $6.86 billion.
In 2021, the company expects to see revenue of at least $6.05 billion with an EBITDA margin in the low double digits.
In Q1, it had an FCF of $137 million. For the TTM ended March 31, its FCF was $620 million, implying an FCF yield of 18%.
I’m not a fan of energy stocks, but it’s hard not to notice FTI stock’s value at current prices.
Orix Corporation (IX)
It’s always nice to be able to include a stock that I’ve previously recommended. In the case of Orix, I suggested investors take a look at the Japanese diversified financial services company in May 2020.
I recommended Orix partially because of its U.S. division, which has its hands in all kinds of financial pies. It manages more than $70 billion in assets.
Fast forward to today, and IX stock is up 48% over the past 14 months. Its momentum doesn’t look like it will slow in the second half of 2021.
I believe this despite the fact that fiscal 2021 wasn’t one of the company’s best years on record. On the top line, revenue grew by less than 1% to 2.293 trillion Japanese Yen ($20.7 billion). Its pre-tax income fell 30% to 287.5 billion Japanese Yen ($2.6 billion).
There are a lot of moving parts in Orix’s business. For example, Orix USA’s revenue was up 2% in 2021, but its segment profits fell 23%. The latter decline was primarily due to the sale of equity ownership in Houlihan Lokey (NYSE:HLI) in fiscal 2020.
I suggest you visit Orix’s various sites, including its investor relations page. It’s a diamond in the rough.
Stocks to Buy: Jazz Pharmaceuticals (JAZZ)
If there’s one thing I like to see from most non-financial stocks, it’s strong free cash flow.
Jazz Pharmaceuticals, a developer of medicines for neuroscience and oncology-related treatments, has excellent FCF. In the trailing 12 months, it had $750 million in FCF and an FCF yield of 6.8%.
Many cannabis investors jumped on JAZZ stock after the company acquired GW Pharmaceuticals in May for $7.6 billion in cash and stock.
GW’s cannabis-based medication Epidiolex treats children with rare types of early-onset epilepsy. In 2020, revenue from Epidiolex grew by 73% to $511 million. This growth, in addition to the company’s sleep disorder medicine Xyrem, shows that Jazz has the makings of a major player in the drug development industry.
Of the 17 analysts covering JAZZ, 15 rate it a buy, one rates it overweight, and one rates it a hold. In their eyes, it’s a clear buy with a target price of $208.82.
Masonite International (DOOR)
It wouldn’t be a proper gallery from a Canadian writer if it didn’t have a Canadian company in its midst. Masonite, a Toronto-based manufacturer of doors, fits the bill nicely.
Masonite’s history dates back to 1925, but the Canadian connection didn’t happen until 1999. That’s when Premdor Inc. entered into a strategic alliance with Masonite Corp., then owned by International Paper (NYSE:IP). A year later, Premdor acquired Masonite from IP for $523 million. Once the acquisition closed, the Premdor name was replaced with Masonite.
Masonite had sales of $301 million in 1999. In 2020, they were $2.26 billion with a TTM FCF of $230 million and an FCF yield of 8.5%.
As for Masonite’s business, it generates 73% of its sales from the North American residential market. Europe accounts for another 11% of sales, and its architectural business is responsible for the rest.
It is one of only two vertically integrated residential interior door manufacturers in North America. New residential construction accounts for 45% of its North American sales, while the renovation market accounts for the remaining 55%.
The company is continuing to grow its margins. In 2015, its adjusted EBITDA margin was 10.9%. Today, it’s over 16%. That’s how you grow free cash flow.
Stocks to Buy: Paramount Group (PGRE)
Paramount Group is a real estate investment trust (REIT) focused on owning the best assets in the best markets and providing top-notch service for tenants.
Founded in 1978, it owns properties in New York, San Francisco and Washington, D.C. Its 19 assets are valued at approximately $13.5 billion. These properties cover 13.9 million square feet of leasable space and generate $358 million in annualized cash net operating income.
New York City accounts for 70% of the REIT’s gross asset value and 62% of its leasable square feet.
While the REIT’s office real estate accounts for a concerning 96% of its revenue, the quality of its properties enables it to charge top dollar rents compared to its peers. Further, none of its largest tenants accounts for more than 4.5% of its annual rent. Most importantly, 32% of its leases will not expire until 2031 or thereafter.
Despite Covid-19 affecting its business, Q1 2021 saw the REIT deliver $50.6 million in core funds from operations. That was down from $61.5 million a year ago, but still very positive. As re-openings accelerate, its earnings will too.
Genpact helps Global Fortune 500 companies transform their digital operations to deliver a world that works better for people.
In the first quarter, all Genpact’s financial metrics exceeded expectations. Revenues grew 1%, excluding currency, to $946 million while adjusted earnings per share rose 11% to 59 cents.
For all of 2021, Genpact expects revenue of at least $3.93 billion, 5% higher than last year, with an adjusted EPS of $2.27.
A real-world example of Genpact’s work is its partnership with Envision Virgin Racing, a Formula E racing team. The partnership aims to make the team’s electric vehicles as efficient as possible during Formula E races.
“Genpact’s technology helps Envision Virgin Racing do this with data analytics and augmented intelligence — the combination of machine-generated insights and human know-how, context, and experience — that engineers, drivers, and pit crew rely on during races to make quick decisions and shift strategies,” Fast Company reported on July 12.
Now, multiply this by hundreds of companies across many different industries, and you have the makings of a successful business services provider.
Genpact currently has an FCF yield of 6.7%, which can provide investors with an excellent entry point.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.