September and October have historically been considered two of the worst months for the market, and this year has been no different. Investors are dealing with an assortment of concerns ranging from the debt crisis to…
supply chain issues. In times of volatility, one strategy I like to employ is investing in “cash cow” stocks. These companies continuously produce steady cash flow.
It is named cash cows due to the similarity of cows producing milk regularly. Companies that produce steady cash flow are more equipped to navigate rocky markets or economic conditions than companies with low cash flow. This is because they have excess money to use as they see fit. A great place to find cash cow stocks is to look at the A-rated Pacer U.S. Cash Cows 100 ETF (COWZ).
The ETF screens the Russell 1000 for the top 100 companies based on free cash flow yield. Plus, since the beginning of September, the ETF has outperformed the S&P 500. So I imported the ETF’s holdings into a screen to find the stocks with a Buy rating or higher in our POWR Ratings system. Some of the top stocks included LKQ Corporation (LKQ – Get Rating), Boyd Gaming Corporation (BYD – Get Rating), and United States Steel Corporation (X – Get Rating), which is why I am highlighting them below.
LKQ is a leading global distributor of non-OEM automotive parts. Initially formed in 1998 as a consolidator of auto salvage operations in the United States, it has since greatly expanded its scope to include distributing new mechanical and collision parts, specialty auto equipment, and remanufactured and recycled parts in both Europe and North America.
The company has benefited through strategic buyouts. For instance, the acquisition of Elite Electronics buyout is helping to drive sales and profit for the company. In the first quarter of this year, LKQ acquired Nebraska-based automotive mobile diagnostic services business Greenlight. This is expected to be integrated into its Elitek brand by the end of the year.
In addition, LKQ sees a recovery in demand in its North American and European segments and strength in its Specialty segment. This trend is likely to continue due to robust demand for recreational vehicles and RV parts. Based on this trend, management has upgraded its 2021 outlook. The firm has also initiated a series of cost-cutting initiatives such as closing underperforming locations, consolidating delivery routes, and reducing headcount.
This has helped shore up its margins. Gross margin has also benefited favorable metals pricing. LKQ has an overall grade of A, which translates into a Strong Buy rating in our POWR Ratings system. The company has a Quality Grade of B due to a solid balance sheet. The firm has $329 million in cash as of the most recent quarter, plus a free cash flow yield of 8.2%.
LKQ also has a Growth Grade of B as earnings per share are up 58.4% over the past year. Plus, analysts expect earnings to rise 44.3% this year. We also provide Value, Momentum, Stability, and Sentiment grades for LKQ, which you can find here.
LKQ is ranked #3 in the B-rated Auto Parts industry. For more top stocks in this highly rated industry, click here.
BYD is a multi-jurisdictional gaming company. The company operates wholly-owned gaming entertainment properties, including…
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