It seems to me that a stock-picking method is only as good as the stocks it picks.
Alas, I have seen no response to the system I have been using to zero in on companies with great free cash flow. (See post opening this thread, plus messages #5, #7, #19.)
First, what better way to start than to screen for companies that have the highest free cash flow in the here and now? For this, I personally use the Telescan Pro Search (which, alas, is down with a bug right now -- something that happens far too often). If you screen for free cash flow alone, of course, you will get nothing but financial companies, in which cash generally accounts for a large proportion of the assets. So you throw in other parameters -- 5-year eps consistency, for example, is a good one.
Then you take your top scorers and check out their past free cash flow, as far back as you can. (Thank you, Andrew, for the suggestion about Value Line. I will review its historical summaries as soon as I get over the bug -- caught from Telescan?? -- that's kept me home this past week.) Then, take the ones that have had steadily INCREASING free cash flow, and put them through whatever other tests (sales, eps, whatever)you want.
In this respect, you can't do better than Compaq, for example -- or Herman Miller. (Who was it that said MLHR looked expensive, with regard to free cash flow? According to all the sources I've checked, it looks unusually cheap if you look just at the free cash flow. Also very good on operating cash flow. I would be curious to know what sources the poster looked at.)
Admittedly, this method is not in the least bit sophisticated; no mathematical formulas here. But common sense suggests that the companies that have had great -- and increasingly great -- cash flow in the past are the ones that are more likely to have great cash flow in the future. Give me Compaq over MacDonald's any day -- barring some great computer industry train wreck, of course.
One final point: I still believe that the present price/free cash flow ratio is not only meaningful, but crucial. So, incidentally, do my free cash flow gurus, Hackel & Livnet (who also offer, for the algebra-literate, a mathematical formula for estimating discounted future free cash flows). |
