Crown Crafts: A Sleepy Business With High Cash Flow

NEW YORK (TheStreet) -- With several thousand equities in the U.S. alone, opportunities always await to be uncovered. Easier said than done, though. During periods of broad overvaluation like the present, identifying hidden gems can be tough and doing so requires a unique point of view.

My point of view stems from a unique foundation of investment knowledge: Growing up in Silicon Valley during the Tech Bubble while simultaneously studying the lessons of Peter Lynch.

Reading Peter Lynch's books in high school and studying his investing methods made an impact on a young student of the market. I appreciated his simple approach to stock selection, such as walking through a shopping mall to see what's selling well and to simply invest in what you understand. The contrast of Peter Lynch's growth and value approach with the frothy speculative tech environment provided me with a robust and eclectic foundation of investment experience and knowledge from which to build upon.

This foundation helps me to identify potential opportunities like Crown Crafts ( CRWS).

Now, I'm the first to admit that I am not an expert in all things, but I do hold at least an adequate understanding of dog beds and baby blankets. Yes, that's right, dog beds and baby blankets.

Crown Crafts has a couple of divisions. One produces dog beds and the others sell plush products for infants and babies. Nothing glamorous or "sexy" but certainly stable businesses that won't be replaced by technology in the near future.

Peter Lynch appreciated companies with solid management, dividends when available and solid cash flow. Crown Crafts is a stock that he would love. He could easily understand their products. Management doesn't take multi-million dollar paychecks. It has a 4.3% dividend.

There's also great cash flow in relation to the shares outstanding and current share price.

Cash Flow: One of the most effective metrics utilized by Lynch measures a company's free cash flow (FCF) per share as a percentage of the share price. This can be an effective value filter. The formula is Free Cash Flow/Total shares outstanding divided by share price.

Share Price: Currently, Crown Crafts' metric value equals 5.14% (using a 10 year average of TTM free cash flow). This compares nicely to other popular companies, for example:

The higher the ratio, typically the better the company's FCF in terms of its share price. Keep in mind, high values can sometimes appear due to a hefty debt position on the balance sheet. This particular metric need be viewed in comparison of the company's total debt.

Looking at Movie Gallery stock several years ago would have revealed a ridiculously high value for this metric, but a deeper evaluation revealed a similarly high debt level. Movie Gallery had a pile of debt and had entered bankruptcy, along with many other VHS/DVD rental stores around the country.

Keep other factors in mind and don't use this metric in a vacuum.

This ratio is a value filter and isn't really going to help an investor identify the next new secular growth story. Clearly, baby blankets and dog beds will not spark the next secular bull market. But as a society, we are all going to keep using them. Luckily, Google ( GOOG) probably won't develop a digital replacement (at least for a while). For growth stories, you will need to look toward tech, 3-D printing, robotics, etc.

What else matters? Plenty. How about this: Does anyone even like Crown Craft's products? Yes, they do. Spend a little time looking at the reviews on Amazon.com for their baby and dog products. The dog products are adequately reviewed, but the baby plush products seem to be favorites among parents.

Conceptually, I appreciate stocks like Crown Crafts in this type of environment because they have the ability to hold up better if conditions in the broad market or the economy turn south. The fundamental footing is strong and the business model is robust, dogs wear through beds and babies will continue to drool onto bibs and blankets.

Hypothetically, if the broad market dropped to the 666 price level again, highly popular stocks like Lululemon ( LULU) and Stratasys ( SSYS) would most likely get slammed. Investors could expect similar vulnerabilities within the homebuilders and retail sectors as well.

Crown Crafts fits within the same category as Campbell Soup ( CPB), Johnson & Johnson ( JNJ) and Suburban Propane ( SPH) -- necessary products sold by solid companies.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Andrew McCormick is the president and founder of MKC Global Investments, an alternative investment company (CTA) based in Seattle, WA. Through individually managed accounts, the company provides active strategies that trade in more than 90 global commodity, currency and financial markets.

McCormick contributes market commentary to ZeroHedge.com and China¿s CBN TV. His research has been used in U.S. Senate Agricultural Committee hearings in regard to the troubles facing the financial industry. McCormick also serves in a consulting capacity to assist in risk-management solutions for utility companies, international proprietary trading firms, introducing brokers and hedge funds.

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