Cash Flow Is a Company's Life Blood: These 6 Stocks Fit the Bill

Cash flow is a concept that applies to anyone trying to create and stick to a budget.

The idea is straightforward: Don't spend more cash than what is coming in. But free cash flow is also an important indicator when considering investing in a company as it reflects the financial strength and viability of the underlying business.

There are numerous metrics that should be considered when purchasing a stock, such as the dividend yield, earnings and the price-earnings ratio.

But a company's free cash flow, defined as the amount of money generated from operations less capital expenditures, offers investors a clue as to how well a company can sustain its operations and, subsequently, build wealth for shareholders. A healthy level of cash generation allows a company to buy back shares, make acquisitions, pay dividends and/or repay debt.

Alternatively, if a company consistently uses more cash than it generates, the outlook isn't good.

Several of the investing legends who inspired our stock screening models focus on free cash flow as part of their evaluative process.

Warren E. Buffett, for example, looks for positive cash flow and tends to be wary of companies with heavy capital expenditures such as facilities upgrades and/or research and development costs because they can burn through more cash than they generate.

John Neff, who managed the Windsor Fund for more than 30 years, thought that earnings figures could be subject to accounting gimmicks, so cash flow was a go-to metric evaluating the strength of a business.

And Peter Lynch, manager of Fidelity's Magellan Fund for 13 years and author of One Up on Wall Street, looked for free cash flow yield -- cash flow per share divided by the share price -- of at least 35% before he got excited about a stock.

A company can have high levels of free cash flow for the wrong reasons such as because management is putting off needed repairs or other capital investments, so it is important to evaluate cash generation along with other fundamentals.

Using our guru-inspired stock screening models, here are six picks that pass muster.

Name

Ticker

Stock Price

Guru Models

Cash Flow Metric(s)

Maiden Holdings

MHLD

$17.25

Peter Lynch model

Free cash flow per share: $6.68
Free cash flow yield: 37%

Lear 

LEA

$134.95

John Neff model

Free cash flow per share: $9.09

Free cash flow yield: 6.7%

Greenbrier 

GBX

$41.85

Kenneth Fisher model

Free cash flow per share: $5.22

Free cash flow yield: 12.4%

Cognizant Technology Solutions

CTSH

$56.26

Warren E. Buffett model

Free cash flow per share: $3.07

Free cash flow yield: 5.4%

Universal Forest Products

UFPI

$101.96

Kenneth Fisher model

Free cash flow per share: $5.45

Free Cash Flow Yield: 5.3%

TJX 

TJX

$76.77

Buffett and James O'Shaughnessy models

Free cash flow per share: $2.12

Free cash flow yield: 2.7%

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