I know that many investors like to look for various metric when buying stock s including things like P/E ratio or other valuation methods. One of the most popular measures is price-to-free-cash-flow.
Investors have had some degree of success over the years buying companies that trade at low multiples of free cash. Free cash flow is the actual cash the company generates after all its maintenance expenses are paid and adds back in non-cash expenses like depreciation and amortization.
Companies with free cash flow have the money to grow their business and buyback stock if they so choose. Like all valuation measures, it is critical to find the companies that have sparkling fundamentals in addition to free cash flow. Fortunately, Portfolio Grader can help us in this task.
The Andersons, Inc. (ANDE)
The Andersons, Inc. (ANDE) is involved in a wide range of agricultural related businesses including grain elevators, Ethanol production, railcar leasing and repair, plant nutrients, turf and fertilizer for the lawn care market, specialty food markets and lawn and garden equipment centers.
Analysts have been raising their estimates for the company for both the quarter and the full year as business is better than Wall Street anticipated. The company generates large amounts of free cash flow and currently trades for less than 5 times FCF generated in the past 12 months.
The excellent fundamentals were noticed by Portfolio Grader and ANDE stock was upgraded to an “A” back in August. It remains a “strong buy” today.
RR Donnelley (RRD)
RR Donnelley (RRD) is a 146-year-old company that provides solutions in commercial printing, forms and labels, direct mail, financial printing, print fulfillment, business communication outsourcing, logistics, online services, digital photography, and content and database management.
The company has seen business pick up as the economy improves, and has posted four consecutive positive earnings surprises. RRD generates substantial free cash flow and generously gives back to shareholders. The stock currently pays a dividend of more than 5%, and management has a history of buying back stock.
The improvements in the fundamentals of this company were noticed by Portfolio Grader and the stock was upgraded to an “A” in December. RRD stock remains a “strong buy” at the current price.
Alliance Healthcare Services (AIQ)
Alliance Healthcare Services (AIQ) provides outpatient diagnostic imaging and radiation therapy services to hospitals and other healthcare providers. These services include magnetic resonance imaging (MRI) technology and positron emission tomography and computed tomography (PET/CT) services that generate representations of the internal anatomy and convert them to film or digital media.
As the population ages, the need for these type of diagnostic services are increasing, and the company is seeing explosive earnings growth with profits up more than 90% so far this year. The shares trade at just 5.5 times free cash flow right now in spite of this strong growth.
Portfolio Grader noted the excellent fundamentals at AIQ and upgraded the stock to an “A” back in May of 2013. The company has continued to excel, and the stock remains a “strong buy” at the current price.
Louis Navellier is the editor of Blue Chip Growth.