1 Hot Stock Passes Super Stringent Screen

In the research rooms of investment management firms, returns on invested capital are keenly focused on. Buffett often speaks of this metric as a proxy for what return to expect over the long haul.

So, I decided to run a screen to find stocks with ROIC percentages north of 15%. That’s a high hurdle all by itself that most companies will fail to meet.

But I wanted to add a few other criteria to filter out as many stocks as possible and be left just with the cream of the crop. So I looked to another key metric, free cash flow yield, and set a minimum hurdle of 7%.

Then I wanted to abide by Peter Lynch’s sage advice to pay close attention to the balance sheet so I excluded stocks that were heavily indebted or lacked cash on the balance sheet, so what came out on top?

Key Points

• A screen was run to find stocks with a return on invested capital (ROIC) above 15% and a free cash flow yield of at least 7%. This stringent criteria filtered out most companies, highlighting only the top performers.
• 3 standout stocks are Petroleo Brasileiro, Equinor and Ameriprise Financial.
• Despite some downside risk, Ameriprise Financial stands out with its strong financial metrics (13.9x P/E ratio, 1.4% dividend yield, 35% operating margin, Piotroski Score of 7).

Which Stocks Met The Criteria?

A few interesting energy plays jumped off the page, such as Petroleo Brasileiro and Equinor. The former has an ROIC of 18.5% and a FCF yield of 30.6%. It also appears to have modest debt/equity of 75% for such a capital intensive business and decent upside of 44% to fair value.

Equinor is another play that leapt off the page given its 24.5% ROIC and 9.8% free cash flow yield. Its upside was impressive too at 22.4%, albeit somewhat muted relative to PBR. However, its debt position seemed to sit better at just 57.7%.

But perhaps the most interesting play of all is Ameriprise Financial with its astonishing 56.5% return on invested capital, 11.2% free cash flow yield and 33% upside to fair value. It’s also got $7 billion in cash and an 80.9% debt/equity ratio.

Is It Time to Buy Ameriprise?

It’s not all roses for Ameriprise. If we look to the Ben Graham formula we see downside risk of 57% but that’s counteracted by analysts median price target of $470 per share.

What we like about it is the 13.9x price-to-earnings ratio in addition to the modest, albeit trustworthy 1.4% dividend yield.

With a 35% operating margin and Piotroski Score of 7, the financials appear to be in very good condition overall to justify strong consideration. Best of all is the $4.8 billion of free cash flow.

Ameriprise Financial has lots going for it now including $1.2 trillion in client assets and a network for more than 10,000 financial advisors, one of the largest in the US.

Ameriprise is strongly tethered to the global asset management market that is expected to grow at a CAGR of 8.5% from 2023 to 2028, reaching $145 trillion by 2028. Through its Columbia Threadneedle Investments brand, Ameriprise stands to capture a significant share of this market.

The bottom line is Ameriprise has impressive financials, upside potential and sits in a market with strong tailwinds. As a long-term play, it has all the hallmarks of being an attractive buy.