Value Investing 101: Kroger

From Four Drilling Stocks for Value Investors:

Across the board, both international and domestic oil companies are raising their oil-services budgets to meet expected worldwide demand growth. Budgets for exploration and development are expected to grow by 20% in 2008 and 10% in 2009, according to industry analysts. This bodes well for the companies in the oil service industries. The potential for increased drilling offshore in the U.S. could be an additional source of long-term growth of the industry as well.

Many of the stocks are cheap. I wrote about Bronco Drilling (BRNC Quote) last week. It remains one of my favorite stocks in the group. Shares of the land driller Nabors Industries (NBR Quote) have fallen 50% from the highs and have a P/E of just 8.

Read the full version of Four Drilling Stocks for Value Investors.

From STOCK PICKS: Top 5 All-Around for Oct. 7 :

Chevron (CVX Quote) is one of the world's largest integrated energy companies. The company is engaged in every aspect of the oil and natural gas industry, with major operations in many important gas and oil producing regions worldwide.

We have rated Chevron a buy since October 2003. This rating is based in part on the company's strong growth in revenue and earnings, as well as its attractive valuation levels. For the second quarter of fiscal 2008, the company reported revenue growth of 49.0% year over year. This appears to have helped boost earnings per share (EPS), which improved 15.1% over the same quarter a year ago, thus continuing a trend of positive EPS growth over the past two years. Net income increased 11.1%, rising from $5.4 billion to $6.0 billion.

Chevron's future performance depends largely on the movements of crude oil and natural gas prices. Any adverse changes in these prices could negatively impact revenue. Furthermore, lower sales volumes and margins on the sale of refined products could also negatively affect the company's bottom line. However, we currently feel that the company's strengths outweigh the fact that its shows low profit margins and give the stock good upside potential under most economic market conditions.

Read the full version of STOCK PICKS: Top 5 All-Around for Oct. 7.

From This Nightmare Is a Stock-Picker's Dream:

For long-oriented stock-pickers who find good companies at great prices, many market environments are hard to navigate.

But right now, you are looking at hundreds of well-run companies with strong brand franchises, stellar balance sheets, market-leading positions -- and really cheap stock prices.

When the world returns to normal, you won't be able to buy Home Depot (HD Quote) for the equivalent of five times normalized earnings. (That is to say that Home Depot will eventually rebound to earn $5 a share in profits.)

I cite Home Depot because the company is profitable (even in a housing depression) and has loads of cash and no debt.

Read the full version of This Nightmare Is a Stock-Picker's Dream (RealMoney access required).

From Free Cash Flow Rules: AmEx, Mohawk:

Profits are great, but they don't count for much in the long-run if a company is not generating FCF [free cash flow]. After all, FCF is the money left over after a business pays all its bills.

A few perfectly legitimate accounting adjustments can tweak earnings to management's delight, but at the end of the day, it's the cash that's left over that counts. Businesses that produce healthy amounts of free cash flow can be valued with a higher degree of certainty and margin of safety than simply going on profits.

With everyone sour on the market today, several wonderful businesses continue to pour out fantastic levels of free cash flow and are thus increasing intrinsic value while the equity price sits still. Sooner or later the stock price will catch up.

Value investors love to seek out bargains in distressed industries. One such opportunity exists with Mohawk Industries (MHK Quote).

Mohawk and Shaw Carpet, a unit of Berkshire Hathaway, have a duopoly over the carpet and flooring industry... Over the three years during 2005-2007, free cash flow was $314 million, $615 million, and $710 million, respectively. So far in 2008, free cash flow has been $215 million, but that was with a $200 million charge to working capital in the first quarter.

So what's this cash worth? Let's make some quick, yet conservative assumptions. Considering the phenomenal growth rate in free cash flow over the past three years, let's assume that 2008 free cash flow comes in at $500 million, $210 million less than 2007 (we'll assume a transition year).

Fixation on cash generation keeps your analysis focused on what counts.

Read the full version of Free Cash Flow Rules: AmEx, Mohawk.

From Cramer: Where to Put Your Money Now (Video, Sept. 29):

Jim Cramer gives a rundown of relatively safe positions.

Cramer: "I think that the real values that are going to be created for people who are wiling to hold something for 18 months, still aren't there... I think you have to wait. I mean they're [stock prices] not so low that you can say, 'You know what, I don't care anymore. I'm willing to buy.' So why did we buy the Freeport [-McMoran] (FCX Quote)? ... That's an example of something I've found that I waited literally [until the stock moved] 50% down..."

To watch the video, click the player below:

Plus, don't miss this video on TheStreet.com TV: Cramer: Cheering for Wells Fargo and Wachovia (Oct. 3: This unassisted bid offers great synergies, says Cramer.)