When the Going Gets Tough, the Tough Go for Stocks with Great Value
While the S&P 500 has been enjoying a winning streak for a good chunk of the year, the past month has been fraught with wide swings up – and down.
The likely culprit is the Federal Reserve. Most recently, at the new Fed Chair Kevin Warsh’s debut Fed policy meeting, investors were left worried about higher interest rates.
Because inflation is moving higher, short-term interest rates may soon follow. And if that’s the case, it could spell trouble for higher-priced growth stocks.
But this is not the time to panic and sell.
As I always remind readers, you have to rely on the data. Emotions – particularly fear – should never the basis for your trading.
That’s what I love about TradeSmith: There’s a plethora of screeners, tools, algorithms, and analysts to help you parse through the market noise.
Today, let’s focus on how to best combat a potential market shift: by focusing on value stocks, which could offer less risk and better profit opportunities in the second half of 2026.
The First Step to Finding Great Value Stocks: The Free Cash Flow Yield
When it comes to finding value stocks, my go-to measure is our Free Cash Flow (FCF) Yield metric.
In short, free cash flow represents the cash that a company generates after subtracting operating and capital expenses – and it’s a great guide to find outperforming stocks.
That’s because stocks with high FCF yields tend to outperform the market.
And the FCF yield is simply a stock’s free cash flow per share divided by price. Similar to the dividend yield, a higher FCF yield may indicate a stock is undervalued relative to the amount of cash it generates.
The S&P 500 Index’s average FCF yield is just 2.5% today. But some sectors rate much higher than others on this metric.
In fact, Financials and Healthcare have the highest FCF yields of any other S&P 500 sector – at 5.7% and 4.5%, respectively!
With that in mind, I used our trusty TradeSmith Screener to find Healthcare stocks with rich FCF yields. Here’s what I found…
Log into TradeSmith Finance, and from the main menu bar, click on Invest and then on Screener in the sub-menu.
Next, start a new screener by adding three simple filters, as shown above.
- Markets: S&P 500
- Sector: Healthcare
- Free Cash Flow Yield: More than 5%
This zeroes in on S&P 500 stocks in the Healthcare sector whose current FCF yields that are twice the S&P 500 average.
When I ran my screen with these filters yesterday, I got 27 results, with the top 10 shown below sorted by the FCF Yield column, with highest at top.
You could cast an even wider net by adding more Market filters.
For instance, when I ran this screen on S&P 400 (MID) and S&P 600 (SML) – which include mid- and small-cap stocks, respectively – I found 43 additional results.
Here are the top 10 from that screen, also sorted by Free Cash Flow Yield.
Mike Burnick’s Bottom Line: Cash is king when markets are uncertain, and FCF is the best single measure of value and quality in my book. So, screening stocks for high FCF Yield is a great way to find stocks with the potential to beat the market.
Good investing,
Mike Burnick
Senior Analyst, TradeSmith
P.S. While Healthcare stocks are infamous for being undervalued and lagging behind the broader market, they’ve crept back into the limelight thanks to one massive trend…
You guessed it: artificial intelligence.
In fact, my colleague, Landon Swan of MegaTrends, recently singled out big pharma stocks as well-positioned to benefit from the AI super cycle.
They pointed out recently that “the market for generative AI in drug discovery alone is expected to surge from roughly $1.5 billion last year to more than $10 billion over the next decade.”
That’s a massive opportunity for big pharma to generate even more free cash flow than it has now. And as an extra bonus, stocks in this sector look undervalued today, offering some of the market’s highest FCF yields.
And that’s not the first time that Landon has made a big call. He called NVIDIA at $21, Tesla at $19, and has a track record of finding generational opportunities years before Wall Street catches on.
In his latest endeavor alongside Joel Litman, one of the most respected investment strategists of our time, they’ve identified four little-known stocks sitting at the center of what could be a $23 trillion super-cycle.
Elon Musk recently called this sector “the limiting factor for all of AI.”
Most investors have never heard of it…
And you don’t have much time before this opportunity could vanish completely.
Because what Joel and Landon see is set to culminate this Friday, July 10…
Go here now to get the details – or you might get left behind.