Forget growth stocks like tech. Analysts are recommending that investors go for companies with lots of cash. The market rallied in January — including the tech-heavy Nasdaq Composite, which rose nearly 10.7% last month for its best monthly performance since July. But analysts say companies with pricing power are a safer bet than tech, given that inflation is expected to stay high this year and the uncertainty around when the U.S. Federal Reserve will pivot to lower interest rates. “The Fed is wary of providing too much traction to the ‘pivot’ narrative,” said Robert Schein, chief investment officer at Blanke Schein Wealth Management. “Because we don’t know how high the Federal Reserve plans to hike interest rates, investors should be prepared for more volatility through year-end and into 2023.” “We’re starting to enter a bifurcated market: companies with strong balance sheets will hold up much better than growth companies that have never posted a profit,” he added. Sean O’Hara, president at Pacer ETFs, sounded a similar note, saying that markets will continue to be volatile. Tech stocks have gotten “a little ahead of themselves,” he told CNBC’s ” Squawk Box Asia ” last week. “For now, stocks that trade at a discount to the overall market [price to earnings] that generate high free cash flow are preferable to the growth names that led the last bull market cycle,” he said. Companies with higher free cash flow yields are generally in a stronger position to meet its debt or other obligations. It also indicates how quickly a company can access cash in the event of an emergency or opportunity. Stock picks O’Hara said energy, health care and materials are better bets. His top picks are U.S. biotech company Moderna and oil and gas giant Chevron . He said his firm has been bullish on energy, thanks to high free cash flow yield in the sector. “It’s not 100% the price of oil, it’s in part the reduction in [capital expenditure],” he said. “Energy companies used to take every dollar they could get their hands on … They’re not doing that anymore.” “They’re basically pulling in their horns … they’re buying back shares and they’re paying dividends and increasing their dividends. And so that’s what’s driving really the story for energy,” O’Hara added. Schein of Blanke Schein Wealth Management is also positive on energy and health care. “Quality companies with strong balance sheets and a history of dividend growth are well positioned for a variety of economic environments,” he said. He likes American mining company Freeport-McMoRan , a major copper producer. “This copper-focused company is well positioned to navigate our inflationary environment due to pricing power and high demand,” Schein said. “Investors are looking to fade the growth trade in favor of more reliable cash flow generating stocks. FCX mostly focuses on copper and gold mining, so investors will find the company more attractive as metal prices move higher,” he said. Copper and gold prices have been on a tear, rising 11% and 6% respectively in the year to date.
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