The market is full of unprofitable companies with excessive valuations, and investors need to be far more selective in picking stocks right now, one analyst has told CNBC. Market participants should retreat to stocks with solid fundamentals, and choose companies which are good cash generators, David Trainer, CEO of investment research firm New Constructs, said last week. “We don’t think this is a good market for being in bad risk-reward where you’re looking at unprofitable companies with expensive valuations. And, despite a lot of these sorts of expensive growth stocks seeing a significant decline, we think there’s a lot more risk in them,” he told CNBC’s “Squawk Box Asia” on Jul. 19. “So it’s time to retreat to those businesses that are solid, and those stocks with reasonable and cheap valuations,” Trainer added. Growth stocks, which include the big technology firms, have plummeted this year. Although the Nasdaq bounced last week, it is still down around 24% year-to-date. The index has a price-to-earnings ratio of around 28 times earnings, while the S & P 500 is trading at around 18 times earnings, according to FactSet. 3 cheap stocks which are ‘cash generators’ Trainer named three stocks that he says represent good risk-reward. “The free-cash-flow generation is there and the valuations are cheap,” he said. One is IT firm Cisco . “Its current valuation implies 0% profit growth while the company is clearly growing profits,” Trainer told CNBC. He added that Cisco is well positioned in its space, and is going to “grow profits big time” on the back of the “inarguable” long-term trends of the Internet and primary plumbing infrastructure of tech. He also picked automaker Ford , calling it the “opposite of Tesla.” “Big cash generator, excellent distribution and service platform, proven scalable business model, proven innovator with its successful EVs,” Trainer said of the 119-year-old company. Used car retailer CarMax also makes Trainer’s list, which he described as having an excellent distribution model. ‘Better than index funds’ Trainer said that investing in the right single stocks is working out better than buying index funds at the moment. This goes against conventional investing advice which say index funds, which track indexes, promise greater diversification and are lower risk than buying single stocks. “We think these are better than index funds because … the big index funds like the S & P 500 and the Russell [2000], Russell [3000], they’re carrying so much risk because they’re so heavily weighted to some of these big tech stocks that we think are going to really continue to get crushed, that it’s even safer to be in one … stock and it can be safer than being in the S & P 500,” he told CNBC. Trainer said one example of this kind of stock is JPMorgan , which he says is a “huge cash-flow generator” and safe to hold for the long term. “We think it’s one of the best places if you want to really protect your money and see long-term returns. Banks are a great place to be, especially the best in breed banks,” Trainer concluded.
