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June 24, 2020, 1:43 p.m. EDT

Here are the factors, and the stocks, that will help you play the COVID-19 market

Factor investing falls somewhere between picking individual securities and investing in a huge theme

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By Andrea Riquier


MarketWatch photo illustration/Getty Images, Bloomberg
From Comcast to CVS, the companies have some of the right factors to be buys right now, Ned Davis Research thinks

If we’re currently in the early innings of a bull market, as some analysts think, how should you invest?

There are big themes to consider: “work from home,” for example. And there are stand-out single stocks, like Amazon.com Inc. /zigman2/quotes/210331248/composite AMZN -1.79% .  But an approach that’s somewhere in the middle is factor investing — picking companies according to their performance qualities. Analysts at Ned Davis Research on Wednesday published a research paper on the factors to consider investing in now, and the stocks that fit those criteria.

Investors should select companies based on long-term sales growth, expected price momentum, cash position growth, and free cash flow/enterprise value, wrote Brian Sanborn and Dung Nguyen.

They explain: expected price momentum compares the loftiest analyst price target for the coming year to the most recent stock price. “It reflects the most optimistic expectation for a stock price’s growth over the next year,” they wrote. What’s more, after a market bottom, investors are naturally looking for companies with strong upside potential.

Cash position growth is a measure of balance sheet liquidity: the “12-month point change in cash plus short-term investments divided by total assets,” the analysts write. “A large amount of liquid assets relative to total assets indicates greater financial strength. However, too large of a ratio can indicate management’s failure to invest in the company’s future growth.”

Long-term sales growth measures trend-line sales growth from the previous five years. “Companies with higher values have been delivering top-line growth over multiple years,” the analysts note.

Finally, free cash flow/enterprise value is a measure of free cash flow (cash available for dividends, stock repurchases, debt reduction, reinvestment, and acquisitions), compared to how the companies is trading. “Those trading inexpensively relative to their free cash flow provide a higher margin of safety,” Sanborn and Nguyen write. “Free cash flow/enterprise value has been the best-performing strategy over time.”

The analysts identify about 40 stocks across various sectors that fit those criteria, with the most favored ones noted below.

Company and ticker Sector
UnitedHealth Group Inc. /zigman2/quotes/210453738/composite UNH   Health Care
Intel Corporation /zigman2/quotes/203649727/composite INTC   Information Technology
Bank of America Corporation /zigman2/quotes/200894270/composite BAC   Financials
Comcast Corporation /zigman2/quotes/209472081/composite CMCSA   Communication Services
AbbVie Inc. /zigman2/quotes/202428675/composite ABBV   Health Care
Lockheed Martin Corporation /zigman2/quotes/200691238/composite LMT   Industrials
CVS Health Corporation /zigman2/quotes/209664499/composite CVS   Health Care
Morgan Stanley /zigman2/quotes/209104354/composite MS   Financials
Source: Ned Davis Research; NDR Stock Screener

It’s worth noting that different analysts have different views on when bull and bear market cycles start and end. According to Dow Jones Market Data, the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.88%   entered its current bull market on March 26, the S&P 500 /zigman2/quotes/210599714/realtime SPX -1.12%   entered its current bull market on April 8, and the Nasdaq Composite /zigman2/quotes/210598365/realtime COMP -1.07%   entered its current bull market on April 14.

Read next: Expect ‘violently flat’ markets, but be ready to buy the dip, analyst says

/zigman2/quotes/210331248/composite
US : U.S.: Nasdaq
$ 2,954.91
-53.82 -1.79%
Volume: 8.89M
Sept. 18, 2020 4:00p
P/E Ratio
113.58
Dividend Yield
N/A
Market Cap
$1480.08 billion
Rev. per Employee
$359,671
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/zigman2/quotes/210453738/composite
US : U.S.: NYSE
$ 308.02
+3.04 +1.00%
Volume: 3.80M
Sept. 18, 2020 4:00p
P/E Ratio
17.32
Dividend Yield
1.62%
Market Cap
$292.72 billion
Rev. per Employee
$754,157
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/zigman2/quotes/203649727/composite
US : U.S.: Nasdaq
$ 49.89
-0.43 -0.85%
Volume: 50.12M
Sept. 18, 2020 4:00p
P/E Ratio
9.18
Dividend Yield
2.65%
Market Cap
$212.18 billion
Rev. per Employee
$659,665
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/zigman2/quotes/200894270/composite
US : U.S.: NYSE
$ 25.21
-0.14 -0.55%
Volume: 94.06M
Sept. 18, 2020 4:00p
P/E Ratio
12.11
Dividend Yield
2.86%
Market Cap
$218.42 billion
Rev. per Employee
$543,289
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/zigman2/quotes/209472081/composite
US : U.S.: Nasdaq
$ 45.26
-0.32 -0.70%
Volume: 39.63M
Sept. 18, 2020 4:00p
P/E Ratio
18.15
Dividend Yield
2.03%
Market Cap
$206.75 billion
Rev. per Employee
$513,625
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/zigman2/quotes/202428675/composite
US : U.S.: NYSE
$ 90.11
+0.48 +0.54%
Volume: 10.08M
Sept. 18, 2020 4:03p
P/E Ratio
19.17
Dividend Yield
5.24%
Market Cap
$159.03 billion
Rev. per Employee
$1.09M
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/zigman2/quotes/200691238/composite
US : U.S.: NYSE
$ 395.14
-0.80 -0.20%
Volume: 2.64M
Sept. 18, 2020 4:04p
P/E Ratio
17.32
Dividend Yield
2.43%
Market Cap
$110.46 billion
Rev. per Employee
$512,019
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/zigman2/quotes/209664499/composite
US : U.S.: NYSE
$ 59.57
+1.16 +1.99%
Volume: 13.53M
Sept. 18, 2020 4:00p
P/E Ratio
9.46
Dividend Yield
3.36%
Market Cap
$77.96 billion
Rev. per Employee
$659,586
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/zigman2/quotes/209104354/composite
US : U.S.: NYSE
$ 50.08
-0.17 -0.34%
Volume: 10.74M
Sept. 18, 2020 4:03p
P/E Ratio
9.05
Dividend Yield
2.80%
Market Cap
$78.96 billion
Rev. per Employee
$831,709
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/zigman2/quotes/210598065/realtime
US : Dow Jones Global
27,657.42
-244.56 -0.88%
Volume: 703.89M
Sept. 18, 2020 5:15p
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
3,319.47
-37.54 -1.12%
Volume: 4.09B
Sept. 18, 2020 5:15p
loading...
/zigman2/quotes/210598365/realtime
US : U.S.: Nasdaq
10,793.28
-116.99 -1.07%
Volume: 5.26M
Sept. 18, 2020 5:16p
loading...

Andrea Riquier reports on housing and banking from MarketWatch's New York newsroom. Follow her on Twitter @ARiquier.

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