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, not core operations. Or maybe the screen didn't include the latest announcement of a canceled dividend.

Just like the color-by-numbers books kids doodle on, the picture for stocks pulled from any screen isn't clear until the appropriate hues are 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, determining 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 $100 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.

Today's list of cash-cow stocks shows a number of companies under attack from various market forces, sending shares down to attractive EV/OCF levels. But are these risks real, or just overblown? That's where CAPS can really help.

Several ominous clouds loom over King Pharmaceutical. Even though the company continues to grow its top line -- up to $543 million in the most recent quarter -- King's profits are under attack from lawsuits and the threat of margin-crushing generic drugs. For instance, the company just announced that it will file for a rehearing of a U.S. Court of Appeals decision that invalidated King's patent claims on its blood-pressure drug Altace.

With more than $922 million in cash and equivalents on the books, King has the resources to pursue more drugs to fill its pipeline. King's forward P/E of 8 is on par with its 8.6% growth estimate, making the company fairly valued at current analyst expectations. But some investors are betting that the company has a chance to surprise the Street and grow beyond this rate. And with shares even cheaper now, after more than a 20% drop in the last two weeks, the company may just come through for the 184 out of 204 CAPS investors who believe its shares will outpace the S&P in the future.

Another stock taking a drubbing in the market -- and earning a below-par two-star rating from CAPS investors -- is homebuilder and financer MDC Holdings. The pessimism surrounding the company is no surprise, given the ugly truth about the true state of the housing market. Like its competitors Pulte Homes (NYSE:PHM) and Centex (NYSE:CTX), MDC's financials are taking a beating as home prices drop. This has caused gross margins to shrink to 16.2%, from the past few quarters' typical mid-to-high 20s range. While some believe that the homebuilder's strong cash position of nearly $670 million will help it weather the housing storm in the long run, most CAPS investors see more pain in the future; 43% of All-Stars believe the company will underperform the S&P going forward.

Let 65,000 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 by the CAPS community? It's free to tap the knowledge base and give your own opinion in Motley Fool CAPS.