The only thing better than having to borrow at today’s low interest rates is not having to borrow at all.
These seven cash cows — Credit Acceptance Corp (CACC), Cigna (CI), Aetna (AET), Tesoro (TSO), Helen of Troy (HELE), Valero (VLO) and Cal-Maine Food (CALM) — have huge amounts of free cash flow. This cash can be used to expand business, pay dividends or pay down debt.
It’s a great advantage to have strong free cash flow in this type of market because it allows a company the flexibility to move quickly in any direction given changing market conditions.
This advantage is especially true in sectors where consolidation is happening, like energy and insurance. Being able snap up competitors who are strong niche players or good companies fallen on bad times without taking on huge amounts of debt or diluting shares sets up a company for strong long-term growth.
Here’s a closer look at seven cash cows to herd into your portfolio.
Cash Cows: Credit Acceptance Corp (CACC)
Credit Acceptance Corp (CACC) is a great way to play two sectors: financials and automotive. And both sectors are doing very well now.
Low interest rates have helped fueled the boom in auto sales that continues quarter after quarter. And because CACC originates loans for car dealers, it is the ultimate recipient of the business.
What’s more, cars and trucks are very expensive, and new car loans are now stretching out eight years in some instances. That means CACC can charge a higher interest rate for a longer period in time, which helps guarantee strong margins and free cash flow for many years to come.
The stock is up 55% year-to-date and most analysts are bullish on its continued growth. CACC has blown through most of its recent short-term price targets and if the economy continues to improve, there’s no reason CACC can’t grow well from here.
Plus, with a PE of 15 at current levels, CACC stock is still a bargain.
Cash Cows: Cigna (CI)
AetnaCigna (CI) was acquired by Anthem (ANTM) in late July for $103.40 per share and 0.5152 shares of ANTM stock per share of CI. That averages out to about $187 per share for CI shareholders. CI stock currently trades around $132 per share, so it got a very nice premium out of this deal.
Why? Because CI has been the fastest growing of the big healthcare insurers in recent quarters, and one of the most profitable. It’s almost twice as profitable as ANTM, which is likely the reason ANTM was so interested in buying it.
But there’s some significant push back on this merger from the government as well as the American Hospital Association (AHA). In early August, the AHA sent a letter to the US Department of Justice (DoJ) claiming that the merging of the country’s No. 1 and No. 5 health insurers would reduce competition in 817 geographic markets serving 45 million consumers.
If the deal doesn’t go through, CI is a great buy. If it does go through, you will have a piece of the new ANTM, with all of CI’s free cash flow — a good deal either way.
Cash Cows: Aetna (AET)
Aetna (AET) is a similar story to CI, yet it is the acquirer in the deal with Humana (HUM). They are the No. 3 and No. 4 insurers, respectively. Combined, they would be the largest healthcare insurer in the U.S.
The goal of the deal was to be first to the regulatory table once the Affordable Care Act was reiterated by the Supreme Court. By getting the merger in front of regulators first, Aetna has a competitive advantage over others like CI and ANTM, since they’ll be out ahead of them in the marketplace.
The combined companies will cover 4.4 million Medicare members, representing 8% of all Medicare beneficiaries. And that’s where the growth is expected to come, because the new company would expand its coverage to almost 90% of the eligible Medicare population.
Again, the deal has to go through for all of this to happen. And recently, Hillary Clinton directly named the merger as something that was concerning her about access to care and medical costs.
Regardless, AET is doing fine and will continue to do well, merger or not.
Cash Cows: Tesoro (TSO)
Tesoro (TSO) is a refiner. And while most of the energy patch is getting hammered by low prices and a supply glut, TSO is chugging right along.
As with midstream pipeline companies, TSO doesn’t really care what the price of a barrel of oil is. It makes money on demand.
As long as people are driving, trains are rolling, and factories are running, TSO is going to do all right. It also runs retail gas stations in 16 states under various brand names and does a decent amount of natural gas and natural gas liquids business as well.
But this business is all about margins. It has fixed cost for refining oil or natural gas. If its input (oil) is cheaper, it just factors in its cost plus a profit for its output. It doesn’t get squeezed, because it isn’t beholden to production issues.
And when gas and oil are cheap, consumption usually increases, which is bullish for TSO.
Cash Cows: Helen of Troy (HELE)
Helen of Troy (HELE) is one of those companies that you many not have heard about, but you likely own several of its products under one of the many brand names it controls.
Historically a personal and beauty care brand, HELE is now well represented across housewares and home environment. The company has brands like Vicks, Braun, Revlon, Vidal Sasson and Dr. Scholl’s.
Given the slow-but-steady growth in the U.S. economy, these middle-market brands are the sweet spot for consumers. As their wallets get a bit thicker, price conscious consumers will start moving up from the bargain generic brands and start moving back into more name-brand products … right where most of HELE products are positioned.
There’s a reason HELE stock is up more than 50% year-to-date.
Its most recent quarterly numbers also bode well for coming quarters and reinforce its brand strategy: Revenue was up 15% for the quarter and earnings beat by almost 20%.
Plus, HELE has plenty of cash to continue its brand acquisitions.
Cash Cows: Valero (VLO)
Valero (VLO) is another major U.S. refiner. And its path to profits is all about volume.
The more demand there is for refined energy products, the better off Valero’s bottom line will be. And since it sits between oil supply and consumer/commercial demand, its margins are bulletproof in a market like this.
The real victim in the energy patch has been the upstream companies that do the exploration and production (E&P). When oil is cheap — because of supply-side production — E&P firms have to shut down wells. If wells aren’t operating, all the oilfield service firms as well as some of the pipeline firms get hurt because there’s less work going on.
But refiners are all about serving demand. And when energy is cheap, consumers tend to use more of it. Travel is cheaper, and more people take advantage, whether it’s by car, plane or cruise ship.
VLO is up almost 24% this year but still only sports a PE of 7. Plus it kicks off a nice 2.6% dividend yield. Bottom line: Valero stock is an undervalued cash flow bargain.
Cash Cows: Cal-Maine Food (CALM)
Cal-Maine Food (CALM) sells 24% of the eggs we buy in America. That’s more than 1 billion eggs per year.
To get to that staggering number, it maintains almost 34 million hens and 8 million pullets across the Southeast, Southwest, Midwest and Mid-Atlantic. It’s the largest producer and distributor of shell eggs in the U.S. Its eggs are sold under brand names like Egg Land’s Best, Land o’ Lakes, Farmhouse and 4 Grain as well as numerous house labels.
Cal-Maine’s growth strategy has been simple: Buy up the competition, expand operations and make processing and distribution more efficient. While doing that, CALM also has watched the cage-free, organic specialty market expand and make a big difference in revenue.
This is from the company’s website:
“In fiscal 2015, specialty shell eggs and co-pack specialty shell eggs represented approximately 27.2% and 2.8% of our shell egg dollar sales, respectively, and accounted for approximately 19.8% and 2.0%, respectively, of our total shell egg dozen volumes.”
Plus, CALM distributes a healthy 3.5% dividend at current prices and sports a PE of 10.6. It may not be sexy, but it is a great long-term value.
Louis Navellier is the editor of Blue Chip Growth.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
