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Any thoughts on Free Cash Flow Analysis for stock picking
Old 10-28-2009, 09:06 AM   #1
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Any thoughts on Free Cash Flow Analysis for stock picking

Most of our money is indexed, but I have a small "testosterone induced trading account" that I mess around with sometimes.

Anyway, I came across this on seeking alpha, about using Free Cash Flow Analysis as a way to identify stocks that "might" generate a positive return on an individual basis.

Link: Invest Using Stocks' Price to Free Cash Flow -- Seeking Alpha

Here are a few formulas:

PFCF = Market Price/ (Cash flow per share -Capital Spending per share)

This ratio should be below 15 for best results.

FROIC = FCF per share / (long term debt per share + shareholders equity per share) x 100

This should be 20% or greater.

I was trying to figure some of this out this morning, but I am having trouble finding the numbers that I need to use. I tried using the key statistics on Yahoo finance for KO and this is what I came up with:

PFCF = Market Price/ (Cash flow per share(3.42 )-Capital Spending per share(.22))
FROIC = FCF per share (3.42)/ (long term debt per share (11.95) + shareholders equity per share(10.13))

KO
PFCF: 53.51 / 3.20 = 16.7
FROIC: 3.42 / 22.08 = 15.48%

So KO does not meet the criteria of less than 15 and more than 20%, but then again I am not sure if I am using the right numbers to begin with.

Has anyone tried to analyze stocks this way? Where do you get the most up to date and accurate statistics for each stock?

Tell me what you guys think.

Eladio
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Old 10-28-2009, 10:42 AM   #2
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Generally I start with the SEC filings to get fundamental data and work from there. Your proposed analysis is very simplistic and may lead youinto a lot of value traps. So if a company is in a declining business and is milking it for cash flow while not investing in any new projects or maybe not even maintaining what they have, the company might score really well in your screen.

Either take the time and effort to do a full-blown forecast/fundamental model, or stick to indices.
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Old 10-28-2009, 02:15 PM   #3
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Thanks for the response brewer.

I agree that value traps could be a problem with this method. There certainly are lots of industries (ex. traditional newspaper companies) that are on their way out and are not a good place to put your money.

I guess I'm new enough to this game that I don't quite understand all the aspects of doing a full blown fundamental analysis. I work in healthcare and don't have any formal financial education, so I was just trying to find a way to analyze companies that I could understand. I guess if it was that easy to pick winners, we'd all be doing it.

Thanks,
Eladio
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Old 10-28-2009, 04:43 PM   #4
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You have the general idea. If you are trying to beat the market, you have to beat out a lot of very smart, very experienced players.
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