Low Price-To-Free-Cash-Flow Stocks Like These Are Worth A Look

In this article I present a strategy that explores the basics of cash flow analysis and the implementation of a price-to-free-cash-flow (P/FCF) screen. Firms with low price-to-free-cash-flow ratios may represent neglected firms trading at attractive prices. AAII’s screen looks for companies with a price-to-free-cash-flow ratio below the median for their industry and below the company’s own five-year average. Our Price-to-Free-Cash-Flow screening model has shown impressive long-term performance, with an average annual gain since inception in 1998 of 16.2%, versus 5.8% for the S&P 500 index over the same period.

Seeking Free Cash Flow Generation

Cash generation is “king” for many investors selecting stocks. Earnings, dividends and asset values may be important factors, but it is ultimately a company’s ability to generate cash that fuels the growth in these factors. Strong cash flow allows a company to increase dividends, develop new products, enter new markets, pay off liabilities, buy back shares and even become an acquisition target.