Evaluating Quality Growth Stocks: FCF Yields vs. Growth Expectations
Are quality growth companies over-valued?
I maintain a watchlist of 45 quality growth companies. Currently, the average FCF yield is 3.2%. $Pro Medicus, Ltd.(PMDIY)$ has the lowest yield at 0.5%, and $Qualcomm(QCOM)$ has the highest yield at 6.6%.
$Comfort Systems USA(FIX)$ is definitely up there, also $Fortinet(FTNT)$ and $KLA-Tencor(KLAC)$ . I also re-entered ATOSS Software.
I also factor in growth.
Qualcomm is the cheapest: 25% growth * 6.6% yield = 113
Pro Medicus is the most expensive: 29% growth * 0.5% yield = 19
I also look at it from the other angle, and estimate what the market is pricing in. At a 0.5% yield, I estimate that the market is pricing in 47% growth for Pro Medicus.
$Cadence Design(CDNS)$ is one of my longest held positions. I'm currently forecasting their FCF per share to be $6.20 in 2027. At today's share price, that's a forward FCF yield of 1.9%. So it does look expensive to me. I think the market is pricing in around 20% growth, which is definitely feasible.
If you’re Looking for a spreadsheet full of:
- 300+ high quality companies
- financial data, including return on capital
- qualitative data, including barriers to entry
- valuations
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