This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

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.

Perhaps of greater import, free cash flow yields (defined here as the free cash flow divided by the market capitalization -- though some prefer to use enterprise value) are so much higher than actual yields on government or corporate bonds. Any time you can find a company with free cash flow yields in excess of 10%, you need to take notice.

I've found 15 of them.

Actually, I found more than 50 of these free cash flow yield powerhouses, based on 2010 results. I narrowed the list down to companies that are likely to post robust free cash flow in 2011 (when results are announced) and 2012 as well.

1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
AGCO $46.83 0.26%
CAR $56.80 0.50%
GILD $101.00 -0.07%
HTZ $20.83 0.97%
AAPL $123.25 -0.80%


DOW 17,712.66 +34.43 0.19%
S&P 500 2,061.02 +4.87 0.24%
NASDAQ 4,891.2190 +27.8570 0.57%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs