With bond yields rising and the Federal Reserve poised to raise interest rates, which companies can weather the storm?
Barron’s cites a list of “quality” stocks from Wolfe Research with high levels of profitability and valuations below the S&P 500 forward price-earnings ratio of around 20.
“These stocks can easily service their debts and their valuations are unlikely to be hit as credit spreads widen,” Barron’s said. “Spread widening” refers to the fact that corporate bond yields are rising faster than treasury yields, which means corporate borrowing rates are rising rapidly.
The Wolfe list includes semiconductor company Qualcomm (COMQ) – Get the Qualcomm Inc reportMcKesson medicine dispenser (MCK) – Get the McKesson Corporation report and home builder PulteGroup (MPS) – Get the report from PulteGroup, Inc..
Qualcomm has a net debt to EBITDA (earnings before interest, tax, depreciation and amortization) ratio of 0.2. Most companies have net debt that exceeds EBITDA for a year, according to Barron’s.
Qualcomm has a price-to-earnings ratio of 15.9 based on 2022 earnings and a sports free cash flow yield of 6%. The S&P 500’s overall free cash flow yield is 4.2%, according to Barron’s.
McKesson has a net debt to EBITDA ratio of 1.2 and a PE ratio of 12. Its free cash flow yield is 8%.
PulteGroup has a net debt to EBITDA ratio of 0.2, a PE ratio of 5.2 and a free cash flow yield of 11%.
As for Qualcomm, the company’s fiscal first-quarter revenue, reported last week, was “at the top of management’s guidance, with the company benefiting from the continued ramp-up of 5G smartphones and widespread demand. chips,” wrote Morningstar analyst Abhinav Davuluri. in a comment.
“Despite the continued shortage of chips, the company was able to secure sufficient supply to achieve significant growth through multi-sourcing initiatives.”
But he said he considers Qualcomm shares to be overvalued, with a fair value of $163 and a recent listing of $182.66.