Consistent Cash Creators Value Screen – April 20, 2010

This is a follow-up to a post I wrote earlier today on my stock screen to identify value stocks of companies that are consistent cash creators. I decided to run my Consistent Cash Creators screen again given the amazing performance of the consistent cash creators from last year. Those stocks that were selected last year produced an annual return of 62%!

Before I jump into the new screen results, let me explain how I run this screen. I first start out by using a database of over 9,000 companies. I then filter out companies in the financial sector. From that list I keep only companies with average returns on invested capital greater than 10% over the past five years. I use this metric as a proxy for sustainable growth. Finally, I filter out companies that did not exhibit positive free cash flow growth per share over the past seven years because this is suppose to be a list of cash creators, not destroyers. Applying these filters resulted in a list of 950 companies.

The next step in this screen involves determining how consistent these remaining companies grew their free cash flows. I take the linear regression of free cash flows over the past seven year and determine how close free cash flows followed a linear trend using the r-squared statistic. I then only keep companies that have r-square values greater than 0.90. This reduced the remaining list of companies to 48.

The final step I take is to sort the list of stocks by a value metric. In this case, I used a normalized earnings yield. This earnings yield is equal to a company’s operating earnings before interest and taxes (EBIT) divided by its enterprise value. I used the average of this earnings yield over the past 7 years for today’s screen. The idea here is that using the average EBIT over the past 7 years will adjust for companies at the top or bottom of a particular industry cycle. Here are the top 30 companies sorted by this normalized earnings yield on April 16, 2010:

Company Ticker Norm. EY P/E P/FCF P/B ROIC R2
EMCOR Group, Inc. EME 51.9 11.0 5.3 1.4 11.8 0.98
GameStop Corp. GME 42.0 11.0 8.6 1.5 13.2 0.97
Rural/Metro Corporation RURL 41.6 84.5 4.8 22.3 0.91
NovaMed, Inc. NOVA 41.3 11.1 2.1 0.9 16.7 0.90
Span-America Medical Systems, SPAN 35.9 10.9 9.2 2.4 22.8 0.90
Sherwin-Williams Company SHW 35.1 19.4 13.8 6.3 20.8 0.95
Pre-Paid Legal Services, Inc. PPD 33.4 7.8 6.7 10.8 67.6 0.92
Johnson & Johnson JNJ 22.2 14.8 20.4 3.6 18.8 0.92
Amgen, Inc. AMGN 19.3 13.5 10.7 2.7 14.7 0.92
Smith & Nephew plc (ADR) SNN 17.3 20.1 33.6 4.4 15.8 0.91
Cablevision Systems Corporatio CVC 17.3 27.1 10.9 17.8 0.90
Honeywell International Inc. HON 17.3 16.1 14.5 4.0 13.3 0.90
United Technologies Corporatio UTX 17.0 17.9 21.5 3.4 16.4 0.92
Equifax Inc. EFX 17.0 19.0 13.6 2.8 10.5 0.93
ABB Ltd (ADR) ABB 16.5 17.7 25.1 3.7 19.4 0.95
Emerson Electric Co. EMR 16.2 23.2 19.9 4.4 13.1 0.92
C.R. Bard, Inc. BCR 15.9 18.7 17.8 3.8 19.7 0.91
j2 Global Communications, Inc. JCOM 15.8 16.5 11.8 3.2 19.1 0.99
MICROS Systems, Inc. MCRS 15.4 29.1 15.1 3.7 12.9 0.96
Danaher Corporation DHR 15.3 23.1 17.1 2.2 8.7 0.93
IDEX Corporation IEX 15.0 24.4 18.6 2.2 7.8 0.93
Interactive Data Corp. IDC 14.5 22.8 36.1 2.9 12.9 0.96
ManTech International Corporat MANT 13.0 15.9 14.0 2.2 13.7 0.91
Tyler Technologies, Inc. TYL 12.7 25.5 22.4 4.9 20.2 0.91
Middleby Corporation, The MIDD 12.2 17.8 11.5 3.0 11.8 0.91
IHS Inc. IHS 10.0 25.4 15.8 3.3 12.5 0.91
America Movil S.A.B de C.V. (A AMX 9.8 14.1 32.8 5.5 26.3 0.91
VCA Antech, Inc. WOOF 9.6 17.9 17.8 2.7 11.0 0.92
Immucor, Inc. BLUD 9.5 18.9 20.7 3.4 19.8 0.95
Oracle Corporation ORCL 9.5 23.2 18.8 4.6 17.2 0.95

I’ve already picked up some shares of NovaMed (NOVA) for the Fat Pitch Financials Portfolio. Some of these other consistent cash creator value stocks also look attractive. What are your thoughts on these stocks?

Disclosure: I own shares of NovaMed, Inc. (NOVA). No other stocks mentioned in this article were owned at the time this post was published.

7 thoughts on “Consistent Cash Creators Value Screen – April 20, 2010

  • April 21, 2010 at 3:04 pm
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    Did you mean this list was created April 16 *2010*? You have 2009. I’m assuming its a new list though.

  • April 21, 2010 at 6:44 pm
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    Yes, I did mean April 16, 2010. This is a new list of stocks. Thanks for pointing out that confusing typo, Mike.

  • April 27, 2010 at 9:37 pm
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    Interesting, but since your screen excluded financials, the benchmark against which to compare is SP500 net of financials, not the whole SP500. I think you still beat that benchmark over the last year, but the alpha is surely smaller. For instance the VFH (vanguard financials ETF) underperformed SPY by about 25% over that time period.

  • May 2, 2010 at 5:45 pm
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    How are you defining FCF and ROIC? More importantly, how are you able to sort through several years of that data for thousands of companies so efficiently? Are you calculating & plugging in the data yourself, or utilizing some provider? Thanks!

  • May 2, 2010 at 6:01 pm
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    FCF is defined as cash from operations minus capital expenditures.

    ROIC is defined as Net Operating Profit After Taxes (NOPAT) ÷ (Equity + Total Debt). I probably should use a better definition, but that’s the one that came with the software I’m working with.

    I am using Stock Investor Pro and Excel to run this screen. Some of the calculations as manual and the return numbers are based on Yahoo Finance historical numbers for the most part (I had to find other sources for a few stocks.). The data provider is Reuters I believe.

  • May 2, 2010 at 6:03 pm
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    Ethan – Thanks for pointing out the issue with excluding financial companies. Does anyone know where I can find an S&P 500 index returns excluding financials?

    I also plan on test the Consistent Cash Creators screen before the financial crisis. I’m almost done with 2007 and then I’ll work on 2006. Stay tuned.

  • November 27, 2010 at 10:58 pm
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    George, you can use the Keelix backtester to backtest this strategy back to 1998.

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