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Strategies & Market Trends : Free Cash Flow as Value Criterion -- Ignore unavailable to you. Want to Upgrade?

To: Andrew who wrote (8)	10/26/1997 4:51:00 PM
From: VALUESPEC	Read Replies (1) \| Respond to of 253

Andrew, I enjoyed reading your posts on cash-flow. I, too, am a fan of cash-flow to some degree. I have also read a few books on Warrne Buffet, Peter Lynch, etc. I don't believe that you listed William O'neil's "How To Make Money In Stocks". I also found that an important book to read, though it strays from the cash-flow method. Though I am a fan, though not a close follower of the cash-flow method of investing, I found it interesting the when I looked at some of the stocks you bought in late (?) 1996 have still not performed very well (EK, MCD, COHR). Regarding McDonald's, I don't consider myself an expert, but my impression is that they have an inferior product and inferior management (the McArch Deluxe was inexcusable). The saving grace for MCD is its international sales (50% of reves?). However, without drastic changes in its US image, I'm not sure MCD can even sustain its current US revenues as the compettion in the US is very intense. I did notice that recently MCD fired some managers and hired some new advertising (why did they ever get rid of their old advertiser- 1978?- they were doing a great job. Didn't Burger King take them over?). I have been curious as to what I was missing when I heard Warren Buffet was buying MCD (around $ 43?). One thing to notice regarding his MCD purchase is that there is some synergism between some of his other holdings. Did you notice that he has stock in Coke which MCD sells? Or that MCD has an exclusive on selling Disney toys? Perhaps Buffet by buying MCD stock not only got a good cash-flow company, but strengthened his other holdings (Dis gets publicity and KO keeps selling Coke). Another thought regarding Warren Buffet buying of MCD is that Warren is now dealing with Billions and Billions of dollars. He must deal with only the largest companies. As a "small" investor, you have the opportunity to invest in much better companies which are growing way faster, though cash-flows may not be great since the money may be going back into the business (like MCD). I personally like depressed stocks with great growth, good balance sheet, decent cash-flow, and great quarters ahead. I especially like it when the company says, "business is unusually strong", and the stock price is still depressed. Andrew, and others, I own stock in BNGO. The board, like this one, is a smart board. I would encourage you to visit it- and perhaps add your expertise in cash-flow to the discussion! I current have: BNGOW MIND (great cash-flow) RADAF ISTN KELL and ELAMF (the slow grower of the lot) I usually sell if the stock continues to drop when I think it should be going up. I sold RECY not too long ago, but it just started to rebound to about $ 6.125. I think it will see $ 20 + in the next two years. Take Care ! VALUESPEC

To: Andrew who wrote (8)	10/27/1997 10:09:00 AM
From: jbe	Read Replies (2) \| Respond to of 253

Andrew and all: free cash flow stars with high eps and relative strength ranks (as per IBD). Although this may be fiddling while Rome burns (looks like another lousy day coming up), I'd nevertheless like to share some data with you. In an earlier post (#5),I listed the stocks I bought this year (only Plexus and Telebras omitted) along with their price/cash flow and price/free cash flow numbers. Note that they all have good eps and relative strength numbers as well, which may (or may not) say something about the virtues of the free cash flow valuation approach. The following meet the basic criteria set by free cash flow gurus Hackel & Livnet (post #7): 1) low debt, and 2) price free/cashflow ratios below 15, that is, in the bottom 20% of all stocks). Another striking feature: their price/free cash flow ratios are all LOWER than their price/cash flow ratios. Generally, the reverse is true (average S&P price/cash flow ratio is 16..52, and the average price/free cash flow ratio is 37.86 -- more than 21 points higher). Chicago Rivet & Machine (CVR): p/FCF: 8.48 EPS: 96 RS: 97 Engineered Support Systems (EASI): p/FCF: 9.85 EPS: 98 RS: 94 Benchmark Electronics (BHE): p/FCF: 12.27 EPS: 88 RS: 89 Herman Miller (MLHR): p/FCF: 12.95 EPS: 90 RS: 95 Compaq (CPQ): p/FCF: 14.13 EPS: 97 RS: 98 The following have price/free cashflow ratios below the S&P average, and/or below the averages for their industries. Note, especially, Tidewater: almost all the highflying companies in oil drilling & services & equipment industries have negative free cash flow. Paul Harris (PAUH): p/FCF: 23.05 EPS: 74 RS: 93 Tidewater (TDW): p/FCF: 26.65 EPS: 99 RS: 75 Intel (INTC): p/FCF: 28.79 EPS: 98 RS: 85 Western Digital (WDC): p/FCF: 39.64 EPS: 94 RS: 92 Most of these stocks also have good PEGS, with four exceptions. One is CVR, which does not have a PEG because no analysts follow it. The others are INTC, CPQ, and MLHR, which from PEG standpoint look fairly valued or even overvalued. BUT, as we know, the PEG is calculated on the basis of earnings, not free cash flow. And the question is: are these stocks actually undervalued, or not? What do you think? Andrew, I did not comment on your numbers (post #6) because I am not quite sure what they relate to. Are they quarterly, or yearly, FCF numbers? Can you elaborate? As for the rest of you, glad to see you here! Thanks to you, this thread actually made it onto the Hot Topics list! (At least for one moment of glory.)

To: Andrew who wrote (8)	10/27/1997 7:43:00 PM
From: Pirah Naman	Respond to of 253

Nice thread. I agree with Andrew about Value Line. I would like to offer a couple of random thoughts: 1) web.idirect.com has a very down to earth description of how to apply VL in a simplified manner. 2) Another book which I think does a good job with explaining valuations is The Witch Doctor of Wall Street by Robert Parks. 3) I have been using a VERY simplified free cash flow calculation based upon VL figures, with good results. I apply it to a fairly limited universe of stocks, but this past January it picked CA, CPQ, DE, and XRX. The problem I have had is that I get very different numbers than do some of you. e.g., MLHR is rather expensive by my figures. 4) The S&P Outlook runs a computer screening of "Buffett criteria" twice a year; one in mid-Feb and one in mid-Aug. Enough random stuff. Pirah

To: Andrew who wrote (8)	10/30/1997 7:29:00 PM
From: Reginald Middleton	Respond to of 253

<I think I can help you here! Have you heard of "The Value Line Investment Survey"? It's an absolute goldmine of data. Many public libraries carry it. Unfortunately, it's not online, so you have to search through it the old fashioned way - flipping pages.> You are in luck. My company is a newly minted reseller of Value Line Institutional Data. It is very pricey but we have lots of freebies. For instance, we cover 5,700 sotcks, and you can query the fundamental forecasts on the web in natural language. We also have a proprietary discounted cash flow and economoc profit model in beta available from the site. Go to rcmfinancial.com and look in the valuation links and the data warehouse links. You may also want to look the discussion I had on more advanced cash flow analyis at exchange2000.com