One of the financial metrics I use to find large-cap stocks trading at a discount is their free cash flow yield.
Free cash flow (or FCF) is the remaining cash flow from operations after subtracting a company’s capital expenditures. Uses for FCF include dividends, share repurchases, debt repayment, acquisitions, and investing in the business.
If a company’s FCF yield is 8% or higher, there is a strong possibility that investors are undervaluing its shares. The inverse of FCF yield is price-to-free-cash-flow (P/FCF).
With this in mind, I screened S&P 500 stocks with a market capitalization of $10 billion or greater to find large-cap stocks trading at a discount. In turn, the screen provided 51 possibilities.
However, 24 were financial stocks, which don’t tend to be good candidates for P/FCF and FCF yield stock screens.
Nonetheless, I found seven large-cap stocks trading at a discount to buy now — with each one coming from a different sector.
|LYV||Live Nation Entertainment||$89.78|
Large-Cap Stocks: LyondellBasell (LYB)
LyondellBasell (NYSE:LYB) is a producer of chemicals such as ethylene, propylene, propylene oxide, methanol, acetic acid and many others.
In Q1 2022, its sales were $13.16 billion, 45% higher than a year earlier. Its earnings before interest, taxes, depreciation and amortization (EBITDA) were $2.02 billion, 27% higher than Q1 2021. It was the company’s strongest first quarter since 2015.
Furthermore, over the past 12 months through the end of March, LyondellBasell had a FCF of $7.76 billion — its highest level in the past five years. The FCF yield is very high at 28.5%. It is also trading at 0.58 times sales, its lowest level in the past decade.
Right now, 27 analysts are covering the company’s stock. In turn, the median target price for LYB stock sits at $114 per share, providing considerable upside over the next 12 months.
Live Nation Entertainment (LYV)
Live Nation Entertainment (NYSE:LYV) is the world’s leading live entertainment company. Overall, the company generates almost 70% of its revenues from concerts, so returning to full-capacity events following the novel coronavirus pandemic is a welcome sight.
In Q1 2022, Live Nation’s adjusted FCF was $89.1 million, a considerable improvement from a year earlier when it used $225.7 million. For the trailing 12 months ended March 31, its FCF was $2.71 billion.
Based on its current market cap of $18.69 billion, it has an FCF yield of 14.5%. And as I said in the intro, anything over 8% is in the value territory.
Moreover, on July 13, Macquarie analyst Paul Golding upgraded LYV stock to “Outperform” from “Neutral” with a $105 price target. And with LYV stock trading at just over $90 per share, that’s 16% upside over the next 12 months.
Of course, the one considerable risk here is that the new Covid-19 variants result in more shutdowns and the canceling of events. However, down 25% YTD, this is likely baked into its share price.
Large-Cap Stocks: Expedia (EXPE)
Expedia (NASDAQ:EXPE) is another victim of the pandemic. But like Live Nation, its business is returning to pre-Covid levels. Down almost 45% YTD, EXPE is trading at its lowest point since November 2020.
If you’re unfamiliar with the online travel company, it has 20 travel brands, more than 200 travel sites, and operates in excess of 70 countries. Its primary brands include Expedia, Hotels.com, Vrbo, and Hotwire.
In May, Expedia launched Open World, a technology platform that allows travel partners of all sizes to utilize its platform for their specific needs.
“If you’re an airline and want to offer cars to travelers, we will have the building blocks for you. If you’re a hotel and want payments and service, here are those building blocks,” Expedia Group Chief Technology Officer Rathi Murthy said. “It’s democratizing the business of travel.”
More importantly, it accelerates the company’s business-to-business (B2B) opportunity, leading to higher revenue and profits.
In the first quarter ended March 31, Expedia’s FCF was $2.84 billion, 42% higher than Q1 2021. Its TTM FCF is $3.91 billion, good for an eye-popping 27.8% FCF yield.
Diamondback Energy (FANG)
You would think Diamondback Energy (NASDAQ:FANG) would be killing it, given the state of oil prices in 2022. However, the Permian Basin operator’s stock is up 8.3% YTD, but down more than 2% in the past month. As recently as early June, FANG was trading as high as $162.24.
In other words, investors might be signaling that oil prices have peaked. However, even at these levels, the company can generate significant free cash. As a result, it plans to return 75% of its quarterly FCF to shareholders through a base quarterly dividend, a variable dividend, and share repurchases.
Additionally, the company’s Q2 2022 dividend payment in August will be $3.05 — 75 cents for base dividend and $2.30 for variable — for a dividend yield of 11.4%.
Diamondback’s TTM FCF is $2.18 billion, good for an FCF yield of 11.5%. So, if you believe oil and gas prices will remain elevated, the stock’s correction over the past month provides an excellent entry point.
Large-Cap Stocks: American Express (AXP)
Overall, American Express (NYSE:AXP) stock has gained more than 76% over the past five years. That’s a decent, if not spectacular, performance.
In terms of its operations, the company has performed reasonably well in recent quarters. Unfortunately, that’s not reflected in its share price, which is down about 8.5% YTD.
In Q2 2022, its revenues were 31% higher at $13.4 billion. Its pre-tax pre-provision income — pre-tax income before its provisions for credit losses — was $2.95 billion, 27% higher than Q2 2021.
As of the end of the first quarter, Amex’s total loans were $99.5 billion, 28% higher than a year earlier — a sign its business is on the mend. Furthermore, in 2022, the firm expects revenue to grow between 23% to 25%, and earnings per share (or EPS) between $9.25 to $9.65. Also, in the second quarter, Amex added more than three million cardholders with a substantial contribution from its platinum and gold cards.
With all of this in mind, consider American Express among the top large-cap stocks available.
Molina Healthcare (MOH)
Molina Healthcare (NYSE:MOH) has delivered for shareholders over the past five years. The health insurance provider for Medicaid and Medicare programs has a cumulative return of 340% over that period, almost six times the S&P 500. Additionally, shares are down a little more than 3% YTD — also much better than the index’s losses.
On July 13, Molina announced it would pay $150 million to acquire My Choice Wisconsin ( or MCW). MCW serves over 44,000 managed long-term services and core Medicaid members across Wisconsin. In turn, these members generate $1 billion in annual premium revenue.
“The addition of My Choice Wisconsin to Molina’s expanding footprint is not only complementary to our existing Medicaid business in Wisconsin, but also representative of our strategic growth initiatives,” Joe Zubretsky, President and CEO of Molina Healthcare, said. “Today’s announcement demonstrates our continuing success acquiring value enhancing revenue streams at attractive valuations.”
As I pointed out in May, Molina has seriously outperformed its healthcare peers over the past five years. Sure, CEO Joe Zubretsky might be paid 278 times the total compensation of its employees, but most shareholders would agree that he’s earned his keep.
Thus, MOH stock is also a great large-cap stock to consider.
Large-Cap Stocks: HP Inc. (HPQ)
Of the seven names on this list, HP Inc. (NYSE:HPQ) is the least favored stock by Wall Street. Of the 17 analysts covering HPQ, only one rates it a “buy.” The average target price is $36.07, 12.7% higher than its current share price.
On June 23, more than 80% of Poly (NYSE:POLY) shareholders voted to approve its sale to HP. The company is paying $3.3 billion for Poly, a leader in video conference solutions and other devices for the workplace. The purchase price includes the assumption of debt.
In turn, Poly enhances HP’s peripherals and workforce solutions businesses. The two markets represent $230 billion in annual revenues and both are growing annually by 8% or more.
So, collectively, HPQ stock is the contrarian play of the bunch. However, still consider it a top large-cap stock to watch moving forward.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.