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Dykstra: Focus on Value Stocks

Stocks in this article: AA NE GOOG

I heard the sad news last night that legendary Phillies broadcast announcer Harry Kalas passed unexpectedly yesterday as he was getting ready to do what he loved best: Call a game. Harry was a great guy and a terrific broadcaster. They don't make them any better.

Harry will be missed by the team, the fans and myself. He's been a mainstay at Phillies games since 1971. That's quite a track record for anyone.

The track record for my deep-in-the-money options trading system is now 100-1, with Monday's $1,000 win on Alcoa (AA). To pick winning stocks, I use a lot of measures to judge whether shares are truly value-priced.

The most important metric I use is the price-to-earnings ratio. But another measure that clarifies the relationship of a stock's going price to its profitability is price-to-cash flow.

Earnings per share numbers -- particularly the ones excluding special charges -- can be smoothed by management from quarter to quarter. To counter that, investors can use the P/CF ratio to verify that a stock is a true value name.

You can look up the P/CF ratio for stocks on various financial services sites, or calculate it yourself. I get P/CF by dividing the stock's market cap by last year's operating cash flow numbers, which are found in the company's most recent cash flow statements.

Let's look at the ratios for a few companies to get a handle on the variation in P/CF ranges. We'll start with a value-oriented stock. On Monday, my pick for my DITM system was Noble Corp. (NE), an oil-services company whose price has been pummeled despite expectations of profit growth this year. I liked Noble's return on equity (32.5%), price-to-earnings-to-growth ratio (0.48), and low PE (4.2) compared to its competitors.

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