10 'Growth' Stocks in Fight for 'Value'

NEW YORK (TheStreet) -- The words "growth" and "value" are common in the investment world, but this oversimplification defies common sense. Of what value is acquiring a faltering business that's trading cheaply? Similarly, at what price paid does growth become irrelevant?

As historical returns dictate, the best investments are a combination of growth and value.

For investors looking for growth -- but afraid of overpaying for it -- using the yield on the 30-year Treasury bond as a ballast can be enlightening. By controlling the inputs in a liability-adjusted cash flow yield formula, investors can determine how much a company must grow its cash flow to provide a rate of return equal to the risk-free rate.

Alternatively, assuming that a company's cash flow stagnates (or peaks), one can approximate the downside risk from the current stock price. To clarify these techniques, let us use Amazon.com ( AMZN) as an example:

Liability-Adjusted Cash Flow Yield (Growth Formula)*

Prior Year's Free Cash Flow / ((Outstanding Shares x Per Share Price) + (Liabilities - Cash))

Amazon.com Liability-Adjusted Cash Flow Yield

$2,920,000,000 / ((448,836,800 x $178.94) + ($7,765,000,000 - $5,885,000,000)) = 3.55%

30-Year Treasury Bond Yield

4.18%

Conclusions

In order for Amazon.com's liability-adjusted cash flow yield to match the 30-year Treasury bond yield, either free cash flow must increase 17.8% (to $3.44 billion) or the per share price must decrease 15.3% (to $151.50).

On the following pages, we've applied this technique to 10 popular "growth stocks" with a stellar past record, ordered by descending liability-adjusted cash flow yield. The results presented are in no way a recommendation to buy or sell each respective stock, but rather, an unbiased look at present valuation with respect to growth expectations.

*Free cash flow data is sourced from each respective company's annual filing. Outstanding shares and asset/liability data is sourced from each respective company's most recent quarterly filing. In many instances, company cash flow data from the trailing 12 months differs substantially from the last annual report.

10. Apple ( AAPL)

Company Profile: Apple designs, manufactures and markets personal computers, mobile communication devices and portable digital music and video players and sells a variety of related software, services, peripherals and networking solutions.

Apple Liability-Adjusted Cash Flow Yield

5.73%

30-Year Treasury Bond Yield

4.18%

Conclusions

Apple's liability-adjusted cash flow yield exceeds the 30-year Treasury bond yield. In order for Apple's liability-adjusted cash flow yield to match the 30-year Treasury bond yield, either free cash flow must decrease 27% (to $12.1 billion) or the per share price must increase 37.5% (to $431).

9. Baidu ( BIDU)

Company Profile: Baidu is a Chinese-language Internet search provider.

Baidu Liability-Adjusted Cash Flow Yield

5.58%

30-Year Treasury Bond Yield

4.18%

Conclusions

Baidu's liability-adjusted cash flow yield exceeds the 30-year Treasury bond yield. In order for Baidu's liability-adjusted cash flow yield to match the 30-year Treasury bond yield, either free cash flow must decrease 25% ( to $1.37 billion) or the per share price must increase 29% (to $139.75).

8. F5 Networks ( FFIV)

Company Profile: F5 Networks provides technology that optimizes the delivery of network-based applications and the security, performance and availability of servers, data storage devices and other network resources.

F5 Networks' Liability-Adjusted Cash Flow Yield

2.80%

30-Year Treasury Bond Yield

4.18%

Conclusions

In order for F5 Networks' liability-adjusted cash flow yield to match the 30-year Treasury bond yield, either free cash flow must increase 49% (to $449 million) or the per share price must decrease 32.7% (to $90).

7. VMWare ( VMW)

Company Profile: VMWare is a provider of virtual infrastructure software solutions. The company works with more than 1,300 technology partners, including leading server, microprocessor, storage, networking and software vendors.

VMWare Liability-Adjusted Cash Flow Yield

2.68%

30-Year Treasury Bond Yield

4.18%

Conclusions

In order for VMWare's liability-adjusted cash flow yield to match the 30-year Treasury bond yield, either free cash flow must increase 55.9% (to $1.375 billion) or the per share price must decrease 35.4% (to $51.80).

6. Netflix ( NFLX)

Company Profile: Netflix is a provider of subscription service streaming movies and TV episodes over the Internet and sending DVDs by mail.

Netflix Liability-Adjusted Cash Flow Yield

2.64%

30-Year Treasury Bond Yield

4.18%

Conclusions

In order for Netflix's liability-adjusted cash flow yield to match the 30-year Treasury bond yield, either free cash flow must increase 58.4% (to $442 million) or the per share price must decrease 38.1% (to $121.50).

5. Chipotle Mexican Grill ( CMG)

Company Profile: Chipotle Mexican Grill develops and operates fast-casual, fresh Mexican food restaurants in 35 states throughout the U.S., the District of Columbia and Ontario, Canada.

Chipotle Mexican Grill Liability-Adjusted Cash Flow Yield

1.83%

30-Year Treasury Bond Yield

4.18%

Conclusions

In order for Chipotle Mexican Grill's liability-adjusted cash flow yield to match the 30-year Treasury bond yield, either free cash flow must increase 129% (to $327 million) or the per share price must decrease 56% (to $111.40).

4. Riverbed Technology ( RVBD)

Company Profile: Riverbed Technology develops innovative and comprehensive solutions to the fundamental problems associated with IT performance across wide area networks (WANs).

Riverbed Technology Liability-Adjusted Cash Flow Yield

1.83%

30-Year Treasury Bond Yield

4.18%

Conclusions

In order for Riverbed Technology's liability-adjusted cash flow yield to match the 30-year Treasury bond yield, either free cash flow must increase 129% (to $201.5 million) or the per share price must decrease 53.9% (to $15.75).

3. ARM Holdings ( ARMH)

Company Profile: ARM Holdings designs microprocessors, physical IP and related technology and software, and sells development tools to enhance the performance, cost-effectiveness and energy-efficiency of high-volume embedded applications.

ARM Holdings Liability-Adjusted Cash Flow Yield

1.14%

30-Year Treasury Bond Yield

4.18%

Conclusions

In order for ARM Holdings' liability-adjusted cash flow yield to match the 30-year Treasury bond yield, either free cash flow must increase 267% (to $334 million) or the per share price must decrease 71.8% (to $5.18).

2. Salesforce.com ( CRM)

Company Profile: Salesforce.com provides customer relationship management service to businesses of all sizes and industries worldwide and provides a technology platform for customers and developers to build and run applications.

Salesforce.com Liability-Adjusted Cash Flow Yield

1.10%

30-Year Treasury Bond Yield

4.18%

Conclusions

In order for Salesforce.com's liability-adjusted cash flow yield to match the 30-year Treasury bond yield, either free cash flow must increase 279% (to $823 million) or the per share price must decrease 76.3% (to $34.10).

1. OpenTable ( OPEN)

Company Profile: OpenTable provides solutions that form an online network connecting reservation-taking restaurants and people who dine at those restaurants. The company's solutions are Electronic Reservation Book, for restaurant customers and a reservation website for diners.

OpenTable Liability-Adjusted Cash Flow Yield

0.77%

30-Year Treasury Bond Yield

4.18%

Conclusions

In order for OpenTable's liability-adjusted cash flow yield to match the 30-year Treasury bond yield, either free cash flow must increase 442% (to $65 million) or the per share price must decrease 78.7% (to $14.90).

-- Written by John DeFeo in New York City

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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