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 profitability levels and valuations lower than the S&P 500’s forward price-to-earnings ratio of about 20.
“These stocks can easily repay their debts and are unlikely to see their valuations get hit as credit spreads widen,” Barron’s says. “Widening spreads” refers to the fact that corporate bond yields are rising faster than Treasury bond yields, which means companies’ borrowing rates are increasing fast.
The Wolfe list includes semiconductor company Qualcomm (QCOM), drug distributor McKesson (MCK) and homebuilder PulteGroup (PHM).
Qualcomm has a net debt-to-EBITDA (earnings before interest, tax, depreciation and amortization) ratio of 0.2. Most companies have net debt that tops EBITDA for one year, Barron’s says.
Qualcomm has a price-earnings ratio of 15.9 based on 2022 earnings and 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 P-E ratio of 12. Its free-cash-flow yield is 8%.
PulteGroup has a net debt-to-EBITDA ratio of 0.2, a P-E ratio of 5.2, and an 11% free-cash-flow yield.
As for Qualcomm, the company’s fiscal first-quarter revenue, reported last week, was “at the high end of management’s guidance, with the firm benefiting from the ongoing ramp of 5G smartphones and broad-based chip demand,” Morningstar analyst Abhinav Davuluri wrote in a commentary.
“Despite the ongoing chip shortage, the firm has been able to secure sufficient supply to achieve significant growth via multi-sourcing initiatives.”
But he said he sees Qualcomm stock as overvalued, with a fair value of $163 and a recent quote of $182.66.
