S&P finds companies that are not only nicely priced, but are increasing cash flow much faster than the overall market
From Standard & Poor's Equity ResearchOne key measure of momentum in a company's business is cash flow, which is calculated by adding a company's net income plus depreciation, depletion, and amortization. Many investors look to find companies that are attractively valued relative to their cash flow.
We thought we'd go a step further and find those names that were not only nicely priced, but are steadily increasing their cash flow at rates far above those of the overall stock market. That was the thinking behind this week's screen.
We started on the value end of the equation by sifting for those names with a price-to-cash flow ratio in the lowest 20% of the U.S. equity universe.
Solid Financial Footing
And even though we were looking for bargain prices, we still wanted high growth in cash flow. So we next screened for companies with cash flow growth (for the trailing 12 months vs. the prior 12 months) in the highest 20% in Standard & Poor's equity universe.
Combined with the strong cash-generating ability, we also wanted to make sure these companies were on a solid financial footing. We next looked for those outfits with a current ratio (current assets divided by current liabilities—basically, a measure of a company's ability to meet short-term debt obligations) in the highest 20% in S&P's equity universe. (BusinessWeek.com readers can get more detailed info on key company metrics by visiting the Company Information page on a particular issue and clicking on the "Financials" tab above the stock chart.)
To avoid speculative issues, each stock had to be priced above $5 per share and have a market cap above $1 billion.
When we ran the numbers, 11 names popped up. The screen favored shares of information technology and health-care outfits. It's worth noting that buyout specialists look for strong cash flow in evaluating companies they're looking to pounce on. While there are no assurances that any of the companies we turned up will become an acquisition target, the names here share the traits that the private equity players frequently look for in a candidate.
Advanced Magnetics (AMAG)
Energy Conversion Dev. (ENER)
Juniper Networks (JNPR)
Cheniere Energy (LNG)
Myriad Genetics (MYGN)
Northern Dynasty (NAK)
PDL Biopharma (PDLI)
Protalix Biotherapeutics (PLX)