It can be tough to decide what to buy in any market. Following last year’s bear market, which seems to be fading, one strategy might be to buy heavily shorted stocks. In the short-term, that may work. For longer-term investments, however, it may be prudent to invest in companies with solid growth and tremendous cash flow.
That’s because cash flow can be used to grow the business, buy a competitor, or even reward shareholders with dividends or buybacks.
Many large-cap energy companies have been using their cash flow to reward shareholders, rather than potentially overpay to reinvest in marginal energy finds or smaller companies right now. That’s been a boon to many shareholders, and the trend looks set to continue.
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One winner is Chevron (CVX), which is even looking to extend the tenure of its CEO based on the company’s success.
Despite a 25 percent jump in shares last year, Chevron is still reasonably priced at 11 times forward earnings. That’s about in-line with the company’s earnings and revenue growth, which can continue as long as energy prices remain elevated.
Action to take: Shares are a reasonable buy at or under current prices, where the stock also yields about 3.5 percent. Chevron has been good at raising its dividend in recent years, on top of the announcement of a big share buyback.
For traders, the June $200 calls, last going for about $1.80, offer mid-double-digit returns on a continued move higher in Chevron stock in the months ahead.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.