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Forget Profit, Bet on 4 Stocks With Increasing Cash Flows

Crunching profit numbers and evaluating surprises might be the preferred methods for scooping up big gains in the impending Q1 earnings season. However, looking beyond profits and assessing a company’s cash position can be far more rewarding because these indicate its true financial health.

In this regard, stocks like Deutsche Telekom AG DTEGY, Banco do Brasil S.A. BDORY, Encore Wire Corporation WIRE and Arcos Dorados Holdings Inc. ARCO are worth buying.

This is because although profit is a company’s goal, cash is the lifeblood of its existence, development and success, and indeed a measure of its resilience. In fact, even a profitable business can fail if its cash flow is uneven and eventually file for bankruptcy. Nevertheless, a company with a healthy cash position has the capability to effectively tide over any market mayhem and still be on its growth curve, besides enjoying the flexibility to make decisions, chase potential investments and run its growth engine.

Furthermore, with uncertainties in the global economy, market disruptions and dislocations, as well as liquidity concerns resulting from geopolitical tensions or the health crisis, analyzing a company’s cash-generating efficiency holds more relevance in the current context.

To figure out this efficiency, one needs to consider a company’s net cash flow. While in any business cash moves in and out, it is net cash flow that explains how much money a company is actually generating.

If a company is experiencing a positive cash flow, it denotes an increase in its liquid assets, which gives it the means to meet debt obligations, shell out for expenses, reinvest in the business, endure downturns and finally return wealth to shareholders. On the other hand, a negative cash flow indicates a decline in the company’s liquidity, which in turn lowers its flexibility to support these moves.

However, having a positive cash flow merely does not secure a company’s future growth. To ride on the growth curve, a company must have its cash flow increasing because that indicates management’s efficiency in regulating its cash movements and less dependency on outside financing for running its business.

Therefore, keep yourself abreast with the following screen to bet on stocks with rising cash flows.

Screening Parameters:

To find stocks that have seen increasing cash flow over time, we ran the screen for those whose cash flow in the latest reported quarter was at least equal to or greater than the 5-year average cash flow per common share. This implies a positive trend and increasing cash over a period of time.

In addition to this we chose:

Zacks Rank 1: No matter whether market conditions are good or bad, stocks with a Zacks Rank #1 (Strong Buy) have a proven history of outperformance. You can see the complete list of today’s Zacks #1 Rank stocks here.

Average Broker Rating 1: This indicates that brokers are also highly hopeful about the company’s future performance.

Current Price greater than or equal to $5: This sieves out low-priced stocks.

VGM Score of B or better: This score is also of great assistance in selecting stocks. Importantly, this scoring system helps in picking winning stocks in their industry categories.

Here are our four picks out of the 18 stocks that qualified the screening:

Deutsche Telekom AG, headquartered in Bonn, Germany, is Europe's largest communications company and one of the largest communications carriers worldwide.

The Zacks Consensus Estimate for 2023 earnings has improved 1.1% over the past two months. Currently, DTEGY has a VGM Score of A.

Banco do Brasil S.A. provides retail and commercial banking services in Brazil and internationally. The services offered include consumer, commercial and agribusiness loans, asset management, foreign exchange, insurance, lease financing and Internet-banking services.

The Zacks Consensus Estimate for Banco do Brasil’s 2023 earnings has been revised 8.9% upward in the past two months. Banco do Brasil has an impressive growth rate of 10% for the next five years. Currently, BDORY has a VGM Score of A.

Encore Wire is a low-cost manufacturer of copper electrical building wire and cable. The company is a significant supplier of residential wire for interior electrical wiring in homes, apartments and manufactured housing, as well as building wire for electrical distribution in commercial and industrial buildings.

The Zacks Consensus Estimate for Encore Wire’s 2023 earnings has been revised 28.1% upward in the past two months. WIRE has a VGM Score of A.

Arcos Dorados Holdings Inc. operates as a franchisee of McDonald's, with its operations divided into Brazil, North Latin America division, South Latin America and the Caribbean division. ARCO also runs quick-service restaurants in Latin America and the Caribbean.

The Zacks Consensus Estimate for 2023 earnings has improved 8.2% over the past month to 66 cents per share. Currently, ARCO carries a VGM Score of A.

Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back-testing software.

The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.

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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.

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Deutsche Telekom AG (DTEGY) : Free Stock Analysis Report

Banco Do Brasil SA (BDORY) : Free Stock Analysis Report

Encore Wire Corporation (WIRE) : Free Stock Analysis Report

Arcos Dorados Holdings Inc. (ARCO) : Free Stock Analysis Report

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Zacks Investment Research