All else being equal, the return you'll earn on any investment comes down to two main things: the length of time you hold it and the price you pay. Of course, every Fool knows that when it comes to investing, all else is never equal. Nonetheless, those two points are well worth remembering as you go about the business of choosing quality stocks.
They're particularly true when it comes to the question of price.
Why so?
Most of us, after all, at least intend to be buy-to-hold types when we stake out a position in a stock we like. Alas, our "like" sometimes kindles into a full-blown romance, and we fall in love with a stock's "story" and let emotion cloud our judgment when it comes to assessing valuation and growth prospects.
Google is a classic example. Don't get me wrong: I love it, too, and I use the search service a gazillion times a day. I also love the bells and whistles it rolls out on a constant basis.
Still, fan though I am, I can't bring myself to buy the stock at its current valuation (for starters, I don't think its declining growth justifies a P/E ratio that hovers near 30).
Why not?
When it comes to investing in individual stocks, it just makes sense that companies trading well below their "intrinsic value" are extremely attractive. Beyond that, I like to find firms with lengthy track records at generating plenty of free cash flow (FCF) -- cash from operations minus capital expenditures.
On that front, Google's FCF track record is too short -- particularly when the market boasts the likes of Microsoft (Nasdaq: MSFT), Autodesk (Nasdaq: ADSK), and EnCana (NYSE: ECA). All three have grown their businesses and cranked out loads of FCF over the course of many years, and despite that impressive achievement, they're still more attractively valued than Google. And that goes double for Nokia (NYSE: NOK), which sports a single-digit P/E and yet has consistently generated plenty of FCF.
Admittedly, those names don't have quite as much "sex appeal" as Google. But if that's the profile you're after, you could always consider the likes of Coach (NYSE: COH), Cognizant Technology Solutions (Nasdaq: CTSH), and Kinetic Concepts (NYSE: KCI). Each boasts a longer history of cranking out FCF and P/Es closer to the broader market average than Google's.
Digging deeper
To be sure, just because a company makes it through a set of quantitative screens doesn't mean it's a slam-dunk investment. There's more to ferreting out value than just rearview-mirror number-crunching, after all, which is why we focus on our picks' forward-looking prospects.
At the Fool's new Ready-Made Millionaire, a real-money, $1 million portfolio, we've cherry-picked a compact set of companies that fit the profile of future winners. Each is profitable, poised to grow earnings at a very healthy clip, and managed to maximize shareholder value.
If a laser-like focus on value and growth sounds like a compelling strategic two-step, I encourage you to learn more about the service -- which will open to new members in October -- and snag our special report, The 11-Minute Millionaire. The report won't cost you a thing, and we'll notify you just as soon as Ready-Made reopens, too. Call it a two-for-one. Click here to get started.
This is adapted from an article originally published on Aug. 5, 2006. It has been updated.
Shannon Zimmerman runs point on Ready-Made Millionaire and doesn't own shares of any of the companies mentioned. Microsoft is a Motley Fool Inside Value recommendation. Google is a Rule Breakers selection. Coach is a Stock Advisor choice. The Fool has a strict disclosure policy.
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