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

To: jbe who wrote (214)	11/18/1997 6:28:00 AM
From: STYK	Respond to of 253

<<1) What distinguishes List #1 from List #2?>> List #1 are the top ten from 18 months ago. List #2 are the current top ten. <<2) Any particular reason why you limited your search to the large caps?>> Yes, large caps outperformed mid caps. When other criteria were included as other than List, the return decreased. This is a quick and dirty search, but outperforming the S&P by 140% over 18 months is not bad. Of course this has been a large cap market, maybe the next 18 months will favor mid or small cap stocks. I would also be inclined to exclude DOW, it is not in a growth group (notice all the tech stocks). Cement, hmmmm is there a stealth building boom going on? Commercial building has picked up well in my locale. Here is a low cap search I run with price up to $10, and seperately $10 - max. In the top 50 there are currently 4 cement stocks. STOCK PRICE 10.0-999.0 a P/E RATIO Low 100% EARNINGS/SHARE High 100% CUR FY PROJ EARNINGS List Only NXT FY PROJ EARNINGS List Only EPS % CHG LAST QTR List Only EPS % CHG 2 QTR AGO List Only FREE CASH FLOW/SHARE List Only VELOCITY #1 High 100% VELOCITY #2 High 80% RETURN ON EQUITY High 100% 30-DY AVERAGE VOL List Only REL PERFORMANC 3-WK List Only EARNINGS GROWTH 3-YR High 100% ERG High 100% PRICE/CASH FLOW Low 100% DEBT/EQUITY RATIO Low 100% BETA List Only # SHARES OUTSTANDING List Only MARKET CAPITALIZATION List Only PRICE/SALES RATIO Low 100% Regards, STYK (BTW, I would recommend the full version of Pro-Search)

To: jbe who wrote (214)	11/18/1997 12:37:00 PM
From: Pirah Naman	Read Replies (1) \| Respond to of 253

jbe: I agree with, and empathize with, your concern over debt levels. I have previously restricted myself to companies with little or no debt, and have felt uncomfortable with companies I have since bought, simply because of debt levels. (So I'll go back to old restrictions.) But I think your mathematical treatment of debt is somewhat misleading. > (If you use the concept of "enterprise value" (EV = capitalization + debt - cash, you will see why too much debt can cancel out all or much of the benefit of free cash flow.) The "cash" in the above equation is cash in the bank. It is not FCF. When you get a number for FCF for a company, that number is AFTER the payment of interest. The reported earnings have already been reduced by interest payments. Enterprise value isn't a bad way of considering the risk of leverage, but it too can be misleading. If you were to buy a company in its entirety, you wouldn't necessarily pay off the debt all at once, nor would you remove cash all at once. When you evaluated it, you would more likely consider how much of your cash flow would go to meeting the interest payments. This is the concept behind "interest coverage" which is EBIT/interest payments. Debt to equity can also be misleading, simply because book value is as prone to "interpretation" as earnings are. And some companies simply have lower book values as a nature of their business, such as software and service companies. Pirah