Anthony Speciale Stock Market Analyst

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This Time Tested Strategy Can Weather Any Market Storm

We’ve talked a lot recently about the fact that traditional investment portfolios are probably going to struggle over the next seven to 10 years.

The simple fact is that valuations are too high. Price to earnings, price to book and market cap to GDP are all at absolutely nose-bleed levels, and interest rates are historically way too low.

We’re probably going to see much slower earnings growth, so it’s going to get tougher to make money from this point. Companies just aren’t going to be able to grow fast enough to justify current stock market valuations.

Inflation is rearing its ugly head, the Federal Reserve could start tapering as soon as its next meeting in November and that means interest rates are going to start to creep up, so the key underpinnings of the current valuations are going away.

That’s going to make things very tough for a traditional stock portfolio over the next decade.

So, what do we do about this? Well, we need to look for strategies that can do well no matter what the stock market is doing.

Finding Fundamentally Strong Stocks

One great strategy is owning community banks, which we talk about often. Another is my black swan strategy that is designed to protect investors during market crashes. But what I want to talk to you about today is even more simple, and it can be executed quite easily.

What we need to do is find stocks that are trading with very high Piotroski F-Scores — a score between zero and nine that measures the strength of a company’s financial position. We only want to look for companies scoring eight or nine on this scale.

Then, we’re going to refine that list and only look at the stocks that are trading at less than 10 times free cash flow. Once we have that universe, we’re only going to buy the 10 stocks that are trading at the lowest multiple of free cash flow.

What we’re left with are companies trading at ridiculous bargain prices but producing a ton of cash that can be used for things like paying dividends, buying back stock and, especially, repaying debt.

The Company Hauling Profits to Shareholders

USA Truck, Inc. (USAK) is, as the name would imply, in the trucking business here in the United States.

Although it’s been a struggle to find drivers for trucking companies and we have some chokepoints along the supply chain, demand for trucking services as the economy expands has been tremendous.

USAK is experiencing record business, including record revenue and record profits this most recent quarter, and analysts are estimating earnings growth of north of 25% a year over the next several years. But in spite of this record outlook, the stock is trading for less than four times free cash flow.

The company is also doing one of my favorite things with all of its free cash flow — paying down debt and strengthening the balance sheet. That’s one of the best ways to return capital to shareholders and increase shareholder value. It’s just as good, if not better, than paying a dividend or buying back stock.

I also would not be surprised to see a larger trucking company come in and buy USAK at some point in the future for a massive premium to the current stock price.

If that happens, we’ll win in the short term. But there’s a big win here in the longer run, too, because this company is probably worth three to four times what the share price is right now.

Insider also have a lot of skin in the game. Combined, they own about 9% of the company. So in order for them to do better, they have to make shareholders wealthy as well.