Benzinga - by Shanthi Rexaline, Benzinga Editor.
The so-called “Magnificent Seven” stocks served as the backbone of the rally seen in 2023, and as the new year unfolds, most have maintained their uptrend amid volatility. However, one category of stocks has outperformed the “Mag 7’s” performance over the past 90 days, and a portfolio manager shared insights into the reasons for their exceptional performance.
What Happened: Companies capable of generating robust cash flow are back in favor, according to Sarat Sethi, Managing Partner at Douglas C. Lane & Associates. Speaking on CNBC’s Last Call late Thursday, the portfolio manager remarked, “The market is being very selective; it’s not just saying, ‘Hey, you gotta have great margins, you have to have really growing cash flow.'”
Sethi responded to the CNBC host’s observation that shares of “90’s tech titans” such as International Business Machines Corp. (NYSE:IBM), Oracle Corp. (NYSE:ORCL), Dell Technologies, Inc. (NYSE:DELL), and Intel Corp. (NASDAQ:INTC) have gained more than the “Mag 7” shares over the past three months.
Oracle is in cloud computing and is also involved in AI, Sethi noted. The common factor among the old tech giants is that they have all experienced growth in their cash flow, he said, adding, “When you have interest rates where they are today, that’s what the markets are really focused on.”
“So can you grow, and can you have cash flow, and that’s going to follow you,” Sethi said. The portfolio manager also highlighted other companies in the tech space such as GoDaddy Inc. (NYSE:GDDY) and Qualcomm, Inc. (NASDAQ:QCOM) that fit into this trend.
“So you don’t just have to be with the Mag 7, the big generals; you can actually be out of them. You can be in tech, and then there are other parts of the market too,” Sethi added.
"The common factor here is cash flow," says Sarat Sethi as the Mag 7 and 90's tech titans see shares surge. "They've all grown their cash flow… that's what the market's really focused on." pic.twitter.com/Q24D9Bpu5j— Last Call (@LastCallCNBC) January 26, 2024
Why It’s Important: Cash flow is a crucial financial metric, especially from a liquidity perspective. Profits often do not provide a realistic picture of a company’s financial condition and can be easily manipulated by including non-cash items.
In contrast, cash flow offers a realistic picture of the cash available to the company, vital for day-to-day operations and capital investments. This metric is particularly significant in the current high-interest rate environment, as companies need sufficient cash on hand to avoid relying on high-interest loans, which could result in a heavy interest servicing burden.
IBM, which reported its fourth-quarter results on Wednesday, underscored its cash flow strength in the earnings release. CEO Arvind Krishna stated, “For the year, revenue growth was in line with our expectations, and we exceeded our free cash flow objective.”
The company’s net cash from operating activities for the full year amounted to $13.9 billion, up $3.5 billion, and free cash flow increased by $1.9 billion to $11.2 billion.
The Technology Select Sector SPDR Fund (NYSE:XLK) fell 0.83% to $202.40 in premarket trading on Friday, according to Benzinga Pro data.
Read Next: Stock Market Extends Record Highs, S&P 500 Hits 4,900 On Tech Rally, Microsoft’s $3 Trillion Mark: What’s Driving Markets Wednesday?
Photo via Shutterstock
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.