When the market had as bad a year as it did in 2022, there are bound to be some bargains lying around just waiting for investors to pick them up. The ones you should be looking for are those that were sold off without regard to actual business execution or those that are affected by a short-term headwind.
Three companies I think match this description are Visa (V -0.40%), Alphabet (GOOG 9.79%) (GOOGL 10.11%), and Accenture (ACN -0.26%), and I think now is an opportune time to open a position in these great companies.
What makes them bargains
From a valuation perspective, all three companies are trading at relative lows when assessed on a price-to-free cash flow (FCF) basis.
ACN Price to Free Cash Flow data by YCharts
Visa and Alphabet are trading at a significant discount over their long-term averages. Accenture trades around its long-term average, but this is the first time it has returned to a reasonable valuation over the past three years, giving investors a chance to get into the stock if they avoided it due to extreme valuations.
Furthermore, none of these valuations are absurdly high. While some may argue Visa's is a tad high, it earns a premium due to its very high FCF margin of 61%. Compared to Alphabet's 22% and Accenture's 14% FCF margins, I'd say Visa deserves to trade at a premium.
So why is this metric so important? Many investors use FCF to assess a company's health, as it is the amount of cash a company adds to its balance sheet at the end of each quarter. All three of these companies use their FCF to some degree to participate in rewarding shareholders through dividends and buybacks.
When the stock price is suppressed, these have an even greater effect.
Capital return to shareholders is a crucial investment theme
All three companies actively repurchase shares, but only Accenture and Visa pay dividends. Still, each company is returning an impressive amount of free cash flow to shareholders.
| Company | Dividend Yield | One-Year Share Decline | Percent of FCF Returned TTM |
|---|---|---|---|
| Visa | 0.7% | (2.8%) | 83% |
| Accenture | 1.5% | (0.4%) | 66% |
| Alphabet | N/A | (2.3%) | 92% |
Data sources: YCharts, Visa, Accenture, and Alphabet. TTM = trailing 12 months.
Accenture could return more FCF to shareholders, but with its revenue growth of 15% in local currency during its last quarter, using some of its FCF to reinvest in the business is probably wise. Visa and Alphabet don't have much room left to return a lot of FCF to shareholders, but their rapid share repurchase plans will make a difference in the long run by reducing outstanding shares.
Why is that important? Each share controls a certain amount of the company, so if the company repurchases and retires one share, it makes the share you own more valuable. This mechanism helps boost earnings per share (EPS), which many investors use to gauge a company's strength.
However, these stocks are down for a reason, and investors need to know why before scooping up these bargains.
Short-term thinking dominates the market
Accenture's decline went hand in hand with its overvaluation. Now that the company is reasonably valued, it's primed to deliver strong returns to shareholders. With the global economy slowing down, its consulting services will be used less, creating a short-term headwind. However, when the economy begins to roll again, Accenture's expertise in cybersecurity, cloud computing, and many other digitizing trends will be required by clients worldwide.
Alphabet is in a similar boat because the ebbs and flows of the global economy heavily influence its advertisement business. Additionally, its FCF margins have taken a hit thanks to its aggressive hiring program. While the advertisement segment will rebound with the broader economy, the hiring spree is expected to slow in the fourth quarter, at least per what management said during its third-quarter conference call.
As for Visa, investors are worried a recession could affect results, because the more people spend, the more Visa makes. However, management isn't concerned about a recession because its medium-term and long-term goals are relatively unaffected by a short-term slowdown.
With all three companies, most investors are worried about what will happen in 2023 -- not in 2025. This long-term mindset can be a considerable advantage, especially if investors are shopping for bargain stocks that are returning capital to shareholders. Visa, Accenture, and Alphabet fit the bill, and investors should purchase them before their valuations return to normal levels.
