Great Company, Lousy Investment

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. Every Fool knows that when it comes to investing, all else isn't equal, of course. Nonetheless, those two points are well worth bearing in mind as you go about the business of stock shopping for fun and profit.

That's particularly true, I'd argue, 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. Trouble is, our "like" sometimes kindles into a full-blown romance, and we fall in love with a stock's "story," letting emotion cloud our judgment when it comes to assessing valuations 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 at least. And while I'm not exactly an early adopter when Google rolls out new bells and whistles, there are a few to which I've taken a shine. Lately, I've been having a blast with Google Scholar, which is a great way to see what academics in myriad fields are up to these days. The finance service seems impressive, too, and while I won't be chucking Outlook any time soon, Google Calendar ain't too shabby, either.

Still, fan though I am, I wouldn't touch Google's shares, not at a price that adds up to a price-to-earnings ratio hovering above 60.

Why not?
When it comes to investing in individual stocks, I'm a big fan of companies whose intrinsic value clocks in considerably greater than their stock prices. Beyond that, I also like firms with lengthy track records of generating plenty of free cash flow (FCF) -- cash from operations minus capital expenditures -- and shares trading on the cheap.

On that front, Google's FCF track record is too short -- particularly when the market boasts such compelling longer-haul contenders as Procter & Gamble (NYSE: PG  ) , Merck (NYSE: MRK  ) , and UnitedHealthGroup (NYSE: UNH  ) . All of 'em have cranked out billions in FCF over the course of many years, and despite that impressive achievement, they still sport P/E multiples below those of their typical industry rivals.

Admittedly, those names don't have quite as much "sex appeal" as Google. But if it's a "growthier" profile you're after, you could always consider the likes of Amgen (Nasdaq: AMGN  ) , Intel (Nasdaq: INTC  ) , and international pharmaceutical concern Novartis (NYSE: NVS  ) . Each boasts a rich FCF history (pun intended) and a relatively discounted P/E as well.

Why are you waiting?
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 number crunching, after all, which is why I'm a big fan of my colleague Philip Durell's Inside Value newsletter service.

Each month, Philip whittles down the investment universe to just those companies that meet his stringent quantitative requirements and measure up when it comes to more qualitative factors (such as managerial acumen and a laser-like focus on creating value for shareholders) as well.

Shall we dance?
If that sounds like a compelling strategic two-step, I encourage you to take Inside Value for a test drive. It won't cost a thing for a full 30 days, a stretch of time you can use to peruse Philip's complete list of recommendations, every column inch of financial advice he's offered subscribers, and the service's members-only discussion boards, too. So click here to grab your guest pass and to learn how to cherry-pick great investments from the ranks of the market's great companies.

This article was originally published on Aug. 5, 2006. It has been updated.

At the time of publication, Shannon Zimmerman didn't own any of the securities mentioned above. Intel and UnitedHealth are Inside Value picks. UnitedHealth is also a Stock Advisor choice. Merck was once an Income Investor selection. You can check out the Fool's strict disclosure policy by clicking righthere.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 511626, ~/Articles/ArticleHandler.aspx, 10/21/2016 6:05:54 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 4:00 PM
AMGN $158.51 Down -2.99 -1.85%
Amgen CAPS Rating: ****
INTC $35.15 Down -0.28 -0.79%
Intel CAPS Rating: ****
MRK $61.20 Down -0.72 -1.16%
Merck and Co. CAPS Rating: ****
NVS $75.54 Down -0.38 -0.50%
Novartis CAPS Rating: ****
PG $84.33 Down -0.60 -0.71%
Procter and Gamble CAPS Rating: ****
UNH $145.37 Up +0.30 +0.21%
UnitedHealth Group CAPS Rating: ****