Cheat Sheet for Undervalued Stocks
The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
By David Sterman
NEW YORK (Street Authority) -- They say stocks "climb a wall of worry." Well, investors now have something new to worry about.
Concerns are growing that profit margins may have peaked for many companies in 2011 and could slip a bit in 2012 and 2013. It's a valid concern. In past economic cycles, companies operated in an ultra-lean fashion during periods of economic weakness, but needed to spend more money on staff and raw materials when the economy starts to strengthen.If profit margins have indeed peaked and earnings-per-share (EPS) growth is hard to muster, then investors are likely to focus on other metrics that help point the way toward value. My favorite litmus test for a stock's value is in the area of free cash flow (defined as operating income minus capital spending). Every dollar of free cash flow goes right to the cash balance, giving a company even greater flexibility in terms of dividends, stock buybacks and acquisitions.
|Hertz enjoyed a big jump in free cash flow in 2010.|
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