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:
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.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).