Chicago, IL – November 10, 2009- Kevin Matras shows how to search for stocks with increasing Cash Flows, but low Price-to-Cash Flow ratios. Stocks in this week’s article include
Bare Escentuals, Inc. (NASDAQ:
BARE),
Cantel Medical Corp. (NYSE:
CMN),
HealthSpring, Inc. (NYSE:
HS),
Toro Company (NYSE:
TTC) and
Viacom Inc. (NYSE:
VIA.B). Click here for the full story exclusively on Zacks.com:
http://at.zacks.com/?id=5528
Screen of the Week written by Kevin Matras of Zacks Investment Research:
The Price to Earnings ratio (or P/E) is probably the most common ratio in determining whether a company is under or overvalued.
However, the Price to Cash Flow (or P/CF) is another great ratio to do just that.
Cash of course is vital to a company's financial health, especially nowadays, in order to finance operations, invest in the business, etc.
And cash can't really be manipulated on the Income Statement like earnings can.
The reason why some people like this measurement better than the P/E ratio is that the net income of the Cash Flow portion rightly adds back in depreciation and amortization, since these are not cash expenditures.
Whereas the net income that goes into the Earnings portion of the P/E ratio does not add these in, thus artificially reducing the income and skewing the P/E ratio.
So many analysts prefer using the Price to Cash Flow metric to judge a stock's value.
And just like the P/E ratio is calculated by dividing the Price by its Earnings per share -- the Price to Cash Flow ratio is calculated by dividing the Price by its Cash Flow per share.
Also like a P/E ratio, the lower the number, the better.
Currently, the average Price to Cash Flow (P/CF) for the stocks in the S&P 500 is 9.6. For the 12-month forward P/E ratio, it’s 15.3.
But just like the P/E ratio, a value of less than 15 to 20 is generally considered good.
But make sure you compare the stock's P/CF to its Industry, since different Industries will have different numbers that are considered normal.
For example: the average Price/Cash Flow for Gold Mining companies is about 30, whereas it’s about 3 for Telecom.
Screen
The screen I'm running today is relatively simple:
- Zacks Rank = 1
(Only Strong Buys get thru.)
- One Year Projected Growth Rate >= Average for the S&P 500
(Looking for above-market growth rates.)
- Current Cash Flow >= 5 Year Average Cash Flow
(I want to see the Company's cash position improving.)
- Price to Cash Flow less than or equal to Median for its Industry
(I want to see Companies with valuations lower than the median for their respective groups.)
There were 30 stocks that came thru this week's screen. Here are 5 of them:
BARE Bare Escentuals, Inc.
CMN Cantel Medical Corp.
HS HealthSpring, Inc.
TTC Toro Company
VIA.B Viacom Inc.
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