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Closing at $88.97 and $431.72 on March 8, respectively, Exxon Mobil (NYSE:XOM) and Apple (NASDAQ:AAPL) are both worth approximately $400 billion — a price that makes them relatively undervalued stocks according to a research note circulated by Morgan Stanley on Monday.
As analyst Adam Parker wrote in his explanation, seen by Barron’s, the reasoning for such an assessment is simple; now is the time to judge a stock by its free cash flow rather than dividend yield or earnings. “Investors retreated from growth-oriented stocks in February, as these factors did not work, following a strong period,” he wrote. “Instead, stocks with high free cash flow did well, continuing a run that began last summer.”
Although the United States equity markets have generally shrugged off the uncertainty of Washington’s fiscal policy plans in recent weeks, the negotiations still pose a risk to market participants. As a result, investors are looking away from growth-oriented stocks — meaning the stock of a company with earnings growing faster than the overall market — and toward defensive bets. Companies with strong free cash flow represent such an option to Parker…
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