Color to the Numbers: Top Cash Cow Stocks

Thanks to the Internet and sites such as Yahoo! and MSN Money, investors have more tools than ever to search for stock ideas by running screens of stock databases. But screens often return numerous stocks that need to be weeded out because the numbers don't tell the whole story. Maybe the massive growth at one company was due to one-time tax adjustments and not core operations. Or maybe the screen didn't include the latest announcement that a dividend was canceled.

So just like the color-by-numbers books kids doodle on, the picture for stocks pulled from any screen isn't clear until the appropriate color is added to the page. In this edition of "Color to the Numbers," we'll enlist Motley Fool CAPS to screen for strong cash flow stocks to see which ones may be worth investigating further, and which should be cast aside.

Better a screen than a window
The community of knowledgeable investors who rate stocks in CAPS will help us in our search. By pulling up a quote on a particular stock in CAPS, investors can see at a glance how the community rates a company today. Also, investors can see how the very best All-Star stock pickers -- CAPS players with a ranking higher than 80 -- rate a given stock. There's even pitch commentary and blogs that give details behind bull and bear opinions. This gives investors much more qualitative resources than just numbers and tables.

So let's take a look at our cash flow screen for today and a handful of the top candidates. To run this screen, we'll use the following criteria:

• Market cap of at least $250 million
• Enterprise value-to-operating cash flow ratio of less than 5.0
• Free cash flow of at least $50 million
• A balance sheet showing at least $500 million in cash and equivalents

This should give us the cream of the crop. We'll use the enterprise value to operating cash flow ratio (EV/OCF) to sort out companies that run the most efficient cash-generating operations for their size. Having a good chunk of cash on the balance sheet will also give us companies that have a good level of free capital on the books to pay dividends, fund more research and development, or acquire other companies. Finding out just how wisely investors think these companies use their cash is where CAPS comes in.

Opinions with the numbers
Here's a sampling from the list of stocks our screen pulled up today.

Insurer Arch Capital tops our list with a four-star rating from CAPS players. Even though the top line has remained essentially flat over the past 12 months, the company has repeatedly beat Wall Street estimates with strong earnings in each quarter. CAPS investors particularly like Arch Capital's low P/E to growth ratio (PEG), which now stands at 0.6, putting the company in the value bin. Throw in an estimated long-term growth rate of 12% and a low debt-to-capital ratio of 7.3% and you've got a highly favored insurer. In fact, all 43 CAPS All-Stars rating the stock think that Arch Capital will beat the S&P.

Two insurance companies focused on health care also show up: Humana and WellCare. Both companies have earned three stars in CAPS, with bulls pointing to the companies' strong track record and an aging population that should ensure growth. The bears put these cash cows on the fence, however, citing concerns about valuation compared with peers and dependence on government health-care plans. Still, bulls outnumber bears on both companies by almost a 10-to-1 margin.

While it's not too surprising to see insurance firms and financial institutions such as Bank of New York generating lots of cash, a few technology companies make our cash-rich list as well. But while RealNetworks and Novell generate piles of greenbacks, CAPS investors are generally bearish on the companies, so there's more beneath the surface here.

The stock of Novell, which provides open-source software for businesses, has earned the disdain of CAPS investors because of poor execution that's led to unstable revenue and net income. RealNetworks gets a little more love in CAPS, partially because of a recent fall in the shares that dropped the P/E to an attractive 8.9. But some investors cite direct competition with media giants Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) as a big reason to see a high risk in these shares. While six of 45 CAPS All-Stars give RealNetworks the thumbs-down, it's still a cut above Novell: Almost two-thirds of All-Stars pan that company.

Let 30,000 investors be the judge
The collective wisdom of a huge pool of investors can quickly add color to a whitewashed page of numbers. But even with an entire community of qualified opinions acting as the judge, individual investors are still the jury and should perform their own research.

Want to see your favorite screen results run through the wringer in the CAPS community? It's free to tap the knowledge base and give your own opinion in Motley Fool CAPS.

Microsoft is one of dozens of stocks recommended by the Motley Fool Inside Value team. To see what other stocks are helping the service beat the market by seven percentage points, take a free 30-day trial today.

Fool contributor Dave Mock does his best to color within the lines, but reserves his right to artistic expression. He owns no shares of companies mentioned here. Dave is the author of The Qualcomm Equation. The Fool's disclosure policy doesn't see color or the wart on your nose.