In this article, we discuss 10 undervalued high free cash flow stocks to buy amid recession.
Prominent stocks in the United States like Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), and Alphabet Inc. (NASDAQ:GOOG) are trading higher on the back of better-than-expected earnings for the second quarter of 2022 despite the Gross Domestic Product of the country contracting for the second straight three-month period and the central bank raising interest rates to slow down growth and tame inflation. The recession fears at the marketplace have brought stocks with high free cash flows to the limelight once more.
As the macro situation continues to point towards a recession, investors are eagerly exploring for undervalued high free cash stocks that can be picked up at bargain prices to limit some of the losses suffered as a result of investments in high-risk growth stocks during the past few years. Concerns about consumer spending still abound though, limiting the choices for these investors. The Consumer Confidence Index decreased for a third straight month in July, dropping to 95.7 from 98.4 in June. This is the lowest it has been since early 2021.
The labor market is also cooling off as hiring slows, although unemployment numbers remain the lowest they have been in around five decades. According to statistics released by the US Department of Labor, the unemployment rate was 3.6% in July. Labor costs increased by more than 5% on a year-on-year basis in July 2022. Businesses are now being forced to cut their workforce as a result, meaning that the unemployment rate might rise in the coming months, further affecting consumer spending numbers.
Our Methodology
The companies that have high free cash flows and a PE Ratio of less than 15 were selected for the list. Data from around 900 elite hedge funds tracked by Insider Monkey in the first quarter of 2022 was used to identify the number of hedge funds that hold stakes in each firm.
Photo by Sharon McCutcheon on Unsplash
Undervalued High Free Cash Flow Stocks to Buy Amid Recession
10. Meta Platforms, Inc. (NASDAQ:META)
Number of Hedge Fund Holders: 200
PE Ratio: 13.19
Free Cash Flow TTM: $35.8 Billion
Meta Platforms, Inc. (NASDAQ:META) is a tech firm that owns and runs social media platforms. On July 27, the company posted earnings for the second quarter of 2022, reporting earnings per share of $2.46, missing market estimates by $0.09. The revenue over the period was $28.8 billion, down close to 1% compared to the revenue over the same period last year and missing analyst expectations by $130 million. The firm revealed that the monthly active users on the Facebook platform were 2.93 billion as of June 30, an increase of 1% year-over-year.
On July 28, RBC Capital analyst Brad Erickson maintained an Outperform rating on Meta Platforms, Inc. (NASDAQ:META) stock and lowered the price target to $190 from $200, noting that the Q2 results were in line with expectations but third quarter guidance below estimates.
At the end of the first quarter of 2022, 224 hedge funds in the database of Insider Monkey held stakes worth $19 billion in Meta Platforms, Inc. (NASDAQ:META), compared to 248 in the preceding quarter worth $31 billion.
Just like Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), and Alphabet Inc. (NASDAQ:GOOG), Meta Platforms, Inc. (NASDAQ:META) is one of the stocks on the radar of elite hedge funds.
In its Q4 2021 investor letter, Boyar Value Group, an asset management firm, highlighted a few stocks and Meta Platforms, Inc. (NASDAQ:META) was one of them. Here is what the fund said:
“Corporate executives can have many different reasons for selling shares (anticipation of tax law changes, philanthropy, diversification, and much more), but the sheer number of billionaire founders who sold shares in 2021 should raise eyebrows and might well be signaling a market top. Bloomberg’s Ben Steverman and Scott Carpenter report not only that Mark Zuckerberg of Meta Platforms, Inc. (NASDAQ:META) (formerly known as Facebook) sold shares in his company almost every day last year but also that the founders of Google sold ~$3.5 billion worth of stock (the first time either Sergey Brin or Larry Page has sold shares since 2017).”
9. ConocoPhillips (NYSE:COP)
Number of Hedge Fund Holders: 67
PE Ratio: 10.02
Free Cash Flow TTM: $12.6 Billion
ConocoPhillips (NYSE:COP) engages in oil and gas exploration and production. On July 20, news agency Reuters reported that the company was considering the sale of the stake it had in the Ursa platform and Princess subsea well, located in the Gulf of Mexico. If sold, the exit would mark the departure of the firm from the entire US Gulf coast region. In the past free months, the firm has spent nearly $20 billion on well-timed acquisitions as it seeks to diversify while taking advantage of low valuations in the market due to recession fears.
On July 26, Raymond James analyst John Freeman maintained a Strong Buy rating on ConocoPhillips (NYSE:COP) stock and lowered the price target to $135 from $160, backing the firm to continue to generate strong free cash flows in the coming months.
At the end of the first quarter of 2022, 67 hedge funds in the database of Insider Monkey held stakes worth $2.5 billion in ConocoPhillips (NYSE:COP), compared to 56 in the preceding quarter worth $1.5 billion.
In its Q1 2022 investor letter, Diamond Hill Capital highlighted a few stocks and ConocoPhillips (NYSE:COP) was one of them. Here is what the fund said:
“We redeployed capital into ConocoPhillips (NYSE:COP), which was trading at a discount to our estimate of intrinsic value and is well positioned over the long run due to its low-risk asset base.”
8. Novartis AG (NYSE:NVS)
Number of Hedge Fund Holders: 21
PE Ratio: 8.41
Free Cash Flow TTM: $11 Billion
Novartis AG (NYSE:NVS) makes and sells healthcare products across the world. On July 19, the firm posted earnings for the second quarter of 2022, reporting earnings per share of $1.56, beating market expectations by $0.01. The revenue over the period was $12.78 billion, down more than 1.4% compared to the revenue over the same period last year but beating analyst estimates by $40 million. The firm also announced that a previously announced share buyback program of $15 billion was still ongoing.
In early May, investment advisory Morgan Stanley maintained an Equal Weight rating on Novartis AG (NYSE:NVS) stock and raised the price target to CHF 94 from CHF 90. Analyst Mark Purcell issued the ratings update.
At the end of the first quarter of 2022, 21 hedge funds in the database of Insider Monkey held stakes worth $1.84 billion in Novartis AG (NYSE:NVS), compared to 25 in the preceding quarter worth $1.88 billion.
7. BHP Group Limited (NYSE:BHP)
Number of Hedge Fund Holders: 19
PE Ratio: 8.27
Free Cash Flow TTM: $24.6 Billion
BHP Group Limited (NYSE:BHP) is a diversified metals and mining firm. On July 18, the firm missed market estimates on iron ore production for the fourth fiscal quarter but affirmed that it expected to increase the production of commodities in the months ahead. The firm said the iron ore production targets were missed due largely to wet weather and a tight labor market. For the 2023 fiscal year, the mining firm forecast iron ore production of 278 million-290 million metric tons, higher than the 282.8 million tons it produced in the 2022 fiscal year.
On July 20, investment advisory UBS maintained a Neutral rating on BHP Group Limited (NYSE:BHP) stock and lowered the price target to GBP 2,050 from GBP 2,100. Analyst Myles Allsop issued the ratings update.
At the end of the first quarter of 2022, 19 hedge funds in the database of Insider Monkey held stakes worth $2.2 billion in BHP Group Limited (NYSE:BHP), compared to 25 in the previous quarter worth $2 billion.
6. Berkshire Hathaway Inc. (NYSE:BRK-B)
Number of Hedge Fund Holders: 104
PE Ratio: 7.98
Free Cash Flow TTM: $23 Billion
Berkshire Hathaway Inc. (NYSE:BRK-B) is a diversified holding company with interests in finance, transport, and utility businesses. Some of the products it sells include boxed chocolates, specialty chemicals, metal cutting tools, components for aerospace and power generation applications, engineered products, recreational vehicles, apparel products, jewellery, and custom picture framing products. The firm employs over 370,000 people across the globe and is based in Omaha. Berkshire Hathaway Inc. (NYSE:BRK-B) is led by the legendary Warren Buffett, who has developed a reputation over the years of shrewd investments in times of recession that provide his firm with handsome long-term returns.
At the end of the first quarter of 2022, 104 hedge funds in the database of Insider Monkey held stakes worth $19 billion in Berkshire Hathaway Inc. (NYSE:BRK-B), compared to 108 in the preceding quarter worth $19.3 billion.
In addition to Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), and Alphabet Inc. (NASDAQ:GOOG), Berkshire Hathaway Inc. (NYSE:BRK-B) is one of the stocks that hedge funds are monitoring.
In its Q1 2022 investor letter, Diamond Hill Capital, an asset management firm, highlighted a few stocks and Berkshire Hathaway Inc. (NYSE:BRK-B) was one of them. Here is what the fund said:
“Diversified holding company Berkshire Hathaway Inc. (NYSE:BRK-B) reported strong earnings during the quarter and benefited from continued share repurchases below intrinsic value. The company also announced significant deployments of excess cash during the quarter, including the acquisition of Alleghany and a large increase in its stake in Occidental Petroleum.”
5. Equinor ASA (NYSE:EQNR)
Number of Hedge Fund Holders: 16
PE Ratio: 7.62
Free Cash Flow TTM: $32 Billion
Equinor ASA (NYSE:EQNR) operates as an integrated oil and gas company. The firm has an impressive dividend profile that stretches back more than a decade. It is slowly trying to build a profile that increases the payouts over time. On July 27, the company declared a quarterly dividend of $0.20 per share, in line with previous. The forward yield was 2.21%. The firm also declared an extraordinary cash dividend of $0.50 per share. The company beat market estimates on earnings for the second quarter of 2022.
On June 17, JPMorgan analyst Christyan Malek upgraded Equinor ASA (NYSE:EQNR) stock to Neutral from Underweight and raised the price target to NOK 350 from NOK 305, noting that the premium multiple of the firm was sticky owing to the developments from Russia.
Among the hedge funds being tracked by Insider Monkey, Boston-based investment firm Arrowstreet Capital is a leading shareholder in Equinor ASA (NYSE:EQNR), with 10 million shares worth more than $382 million.
In its Q2 2021 investor letter, Massif Capital, an asset management firm, highlighted a few stocks and Equinor ASA (NYSE:EQNR) was one of them. Here is what the fund said:
“We currently have two oil-related positions in our portfolio and believe the oil opportunity set is ripe. As one might expect, both positions, (including Equinor: EQNR) performed well during the second quarter, given the steady march higher that oil has made in recent months. We maintain a positive outlook for both companies, although, importantly, our posture is not predicated on an expectation for continued oil price appreciation. This is not because of our inability to imagine scenarios where that does occur, but more out of an abundance of caution for what is a highly volatile commodity that at current price levels should be more than sufficient to generate ample free cash flow for any investable oil firm.
In the future, we expect both firms in the portfolio to generate significant free cash flow and expect EQNR to reinvest that free cash flow into a combination of offshore oil and wind opportunities with high rates of return. The path forward for AOI is more complicated and does warrant a few comments.”
4. AT&T Inc. (NYSE:T)
Number of Hedge Fund Holders: 74
PE Ratio: 7.02
Free Cash Flow TTM: $14.7 Billion
AT&T Inc. (NYSE:T) is a media, communications, and technology firm. On July 21, the company announced that it was cutting the 2022 free cash flow forecast to $14 billion from $16 billion previously. With the firm generating $4 billion in free cash flow in the first half of 2022, this means it is expecting to rake in $10 billion in free cash flow during the second half. The company said it would generate this amount through wireless customer growth, price increases, and lower cash interest expenses.
On July 22, Cowen analyst Colby Synesael maintained a Market Perform rating on AT&T Inc. (NYSE:T) stock and lowered the price target to $24 from $27, noting that elongated collection cycles and increased investment were some of the reasons for the downward cash flow guidance of the firm.
At the end of the first quarter of 2022, 74 hedge funds in the database of Insider Monkey held stakes worth $4 billion in AT&T Inc. (NYSE:T), compared to 70 in the preceding quarter worth $4.9 billion.
In its Q4 2021 investor letter, Weitz Investment Management, an asset management firm, highlighted a few stocks and AT&T Inc. (NYSE:T) was one of them. Here is what the fund said:
“After several quarters of pandemic-induced outsized growth, new broadband connection growth has slowed for U.S. cable operators. This slower growth has coincided with a renewed push by competitors like Verizon and AT&T Inc. (NYSE:T) to offer high-speed data (either via wireless connects or by building new fiber-optic networks).”
3. Shell plc (NYSE:SHEL)
Number of Hedge Fund Holders: 37
PE Ratio: 5.62
Free Cash Flow TTM: $35.8 Billion
Shell plc (NYSE:SHEL) is an energy and petrochemical firm. The firm posted earnings for the second quarter of 2022 on July 28, reporting earnings per share of $3.06, beating market estimates by $0.26. The revenue over the period was $100 billion, up more than 65% compared to the revenue over the same period last year and beating analyst expectations by $17.7 billion. The company also announced that it expected $6 billion in share buybacks to be completed by the end of the next quarter.
On July 29, investment advisory RBC Capital maintained an Outperform rating on Shell plc (NYSE:SHEL) stock and raised the price target to GBP 3,200 from GBP 3,100. Analyst Biraj Borkhataria issued the ratings update.
At the end of the first quarter of 2022, 37 hedge funds in the database of Insider Monkey held stakes worth $5.6 billion in Shell plc (NYSE:SHEL), compared to 41 in the previous quarter worth $2.6 billion. Among the hedge funds being tracked by Insider Monkey, Washington-based investment firm Fisher Asset Management is a leading shareholder in Shell plc (NYSE:SHEL), with 19.5 million shares worth more than $1 billion.
In its Q1 2022 investor letter, Third Point Management, an asset management firm, highlighted a few stocks and Shell plc (NYSE:SHEL) was one of them. Here is what the fund said:
“We have continued to add to our position in Shell plc (NYSE:SHEL), as it trades at the same deeply discounted multiple today that it did last year due to a move up in commodity prices. We are engaged in discussions with management, board members, and other shareholders, as well as informal talks with financial advisors. We have discussed various alternatives with the aim of both increasing shareholder value and allowing Shell plc (NYSE:SHEL) to effectively manage the energy transition. We have reiterated our view that Shell’s portfolio of disparate businesses ranging from deep water oil to wind farms to gas stations to chemical plants is confusing and unmanageable. Most investors we have discussed this with agree that the company would be more successful over the long term with a different corporate structure. Discussions among the parties have been constructive and will be ongoing since stakeholders clearly see these corporate changes as instrumental, particularly if Shell plc (NYSE:SHEL) wishes to become a leader in the energy transition rather than be left behind as a tarnished legacy brand.
Beyond our discussions around corporate structure, there have been two important developments since our last update. First, Shell plc (NYSE:SHEL) announced a plan to redomicile its headquarters to the UK and create a single shareholder class. This move allows greater flexibility to modify its portfolio (either through asset sales or spin-offs) and allows for a more efficient return of capital, specifically via share repurchases. Second, fundamental and geopolitical events have highlighted the strategic importance of reliable energy supplies, especially in Europe. Shell’s LNG business, the largest in the world outside of Qatar, will play a critical role in ensuring energy security for Europe. In our view, the value of Shell plc (NYSE:SHEL) has increased dramatically since our original investment.
While Shell plc (NYSE:SHEL) continues to trade at a large discount to its intrinsic value, with proper management we believe the company can simultaneously deliver shareholder returns, reliable energy and decarbonization of the global economy. We look forward to continued engagement with management and other shareholders and to more strategic clarity from Shell plc (NYSE:SHEL).”
2. Rio Tinto Group (NYSE:RIO)
Number of Hedge Fund Holders: 26
PE Ratio: 5.62
Free Cash Flow TTM: $18 Billion
Rio Tinto Group (NYSE:RIO) is a diversified metals and mining firm. On July 28, the company announced that it had formed a partnership with a Chinese firm named Winning Consortium Simandou and local authorities for the Simandou iron ore mine project. The project is the largest undeveloped iron ore reserve in the world and is based in Guinea. As part of the project, the two firms will also jointly develop a 600-km railway and port to export the ore that is extracted after the production begins.
On July 28, investment advisory JPMorgan maintained a Neutral rating on Rio Tinto Group (NYSE:RIO) stock and increased the price target to GBP 5,350 from GBP 5,300. Analyst Lyndon Fagan issued the ratings update.
Among the hedge funds being tracked by Insider Monkey, Washington-based investment firm Fisher Asset Management is a leading shareholder in Rio Tinto Group (NYSE:RIO), with 14 million shares worth more than $1.1 billion.
1. Vale S.A. (NYSE:VALE)
Number of Hedge Fund Holders: 27
PE Ratio: 3.05
Free Cash Flow TTM: $16 Billion
Vale S.A. (NYSE:VALE) markets iron ore products. The company is based in Brazil and was founded in 1942. It employs more than 74,000 people. Some of the mining interests it has include iron ore and pellets, manganese, ferroalloys, other ferrous products, nickel, gold, silver, cobalt, other precious metals, and copper. The company beat market estimates on earnings per share for the second quarter of 2022 by $0.52 but missed on revenue $450 million due to inflationary pressures on the stock.
On June 22, Morgan Stanley analyst Carlos De Alba maintained an Equal Weight rating on Vale S.A. (NYSE:VALE) stock and lowered the price target to $16 from $22, identifying iron ore futures as a potential headwind for the firm in the near term.
Among the hedge funds being tracked by Insider Monkey, Washington-based investment firm Fisher Asset Management is a leading shareholder in Vale S.A. (NYSE:VALE), with 28 million shares worth more than $573 million.
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Disclosure. None. 10 Undervalued High Free Cash Flow Stocks to Buy Amid Recession is originally published on Insider Monkey.
