Markets are hitting all-time highs right now and there’s a craze in the air as the street continues to speculate on the overall directional trend that the market may or may not take during the second half of the year. Where some see the stock market as over valued or over bought, others like Goldman Sachs Chief U.S. Equity Strategist David Kostin points out that there is one metric that may show how this “bull market” may still be cheap.

The equity strategist at one of the largest banks in the world, Mr. Kostin pointed out in a report on August 2 that the S&P 500 is generally expensive by most all measures except for free cash flow yield. This valuation metric is trending near its historical average, which the report stated is due to a decline in capital expenditures.

Now that capital expenditures are slated to move up, Goldman’s Chief Equity Strategists says that some stocks should benefit. “S&P 500 is expensive according to most valuation metrics, but appears attractively valued on free cash flow yield due to reduced capex investment,” David Kostin, chief U.S. equity strategist at Goldman Sachs, said in a report with other analysts on August 2nd.

Free cash flow yield measures financial performance and is based on a company’s operational cash flows. You then subtract capital expenditures and divide by a stock’s market cap, and voila! In relative terms, a higher free cash flow should yield a more attractive, bullish stance on a security.

By joining a high-adjusted free cash flow yield strategy with a high growth investment strategy, Goldman’s strategist suggests that companies like American Airlines, NetApp, and General Motors could benefit from such a scenario. Kostin said investors, in this environment, can find opportunity by utilizing this methodology because it incorporates a company’s expenditures on research and development, as well.


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