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Bank of America said investors should buy shares in companies with high levels of cash as the broader market outlook is buffeted with headwinds. The S & P 500 fell nearly 20% in 2022, its worst annual performance since 2008, as concern over higher rates dented investor sentiment. The outlook for 2023 isn’t much more promising, with growing expectations of a U.S. economic recession. Bank of America has one of the most downbeat forecasts for the year, with its S & P 500 target of 4,000 implying upside of just 4.2%. However, the bank said there are some stocks that could hold up despite the gloomy backdrop. BofA looked through Russell 1000 stocks with buy ratings from their analysts. They then screened for companies with the highest free cash flow, or FCF, yields. “The average FCF/EV [enterprise value] of the Russell 1000 constituents is 1.8%, suggesting that these names may be best of breed when considering quality characteristics,” BofA said in a note Tuesday. Higher free cash flow yields imply a company is in a stronger position to meet its debt or other obligations. It also indicates how quickly a company can access cash in case of an emergency or opportunity. Here are some of the names that made the cut. Fertilizer and nitrates products maker CF Industries topped the list with a 22% free cash flow yield. The company is coming off a monster year, surging more than 20% after rallying 83% in 2021. Analyst Steve Byrne said he thinks CF can build on those gains, noting: “Tight global nitrogen supplies + Ag cycle could readily continue into 2023.” The stock has buy or overweight ratings from 50% of analysts covering it, and the average price target implies upside of more than 35%, FactSet data shows. Expedia also made Bank of America’s list, with a free cash flow yield of 21%. Analyst Justin Post said the “increasing percentage of travel bookings migrating online + travel agents suggest strong travel demand.” Expedia shares struggled in 2022, losing more than 50% in their worst year since 2008 — when they dropped nearly 74%. Still, the stock has buy or overweight ratings from 50% of analysts covering it, and the average price target implies upside of nearly 30%, according to FactSet. General Motors also turned up on Bank of America’s screen, with a free cash flow yield of 16%. BofA analyst John Murphy noted that the company remains an automotive leader thanks to “its Core to Future transition + continues to develop all the necessary components for the future of mobility services, which we believe may help unlock value over time.” GM is coming off its worst year since 2011, losing almost 43% in 2022. Steel producer Nucor and car-and-truck dealer AutoNation also made the cut, with free cash flow yields of 21% and 13%, respectively. — CNBC’s Michael Bloom contributed reporting.
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