Price-to-Cash Flow vs. PE Ratio: Way to Spot Unappreciated Stocks?
Jack Hough, one of the smarter stock market writers on this planet, has taken his act from Smart Money magazine (may it rest in peace) to Barron’s, and readers who followed are being justly rewarded. Hough most recently highlights stocks with free cash flow that’s not necessarily showing up in current earnings.
On a trailing basis, they’re not too cheap. When we instead look at price to cash flow, things look a little better. Here’s what Hough had to say, in part:
“Over long time periods free cash flow and earnings should tell similar stories, but in the short run they can vary sharply for a long list of reasons, and investors should watch these differences. Research by University of California, Berkeley accounting professor Richard Sloan and others has shown that, when a company's earnings greatly exceed its free cash flow, it's more likely than not to produce disappointing earnings growth and stock returns. But when free cash flow greatly exceeds earnings, it could be a promising sign.”
Amen. You can use the YChart Stock Screener, adding metrics PE ratio and Price to Cash Flow and then easily run down the columns to find stocks where cash flow dwarfs earnings.
From the editors of YCharts. We can be reached at firstname.lastname@example.org.
Filed under: Investing Ideas