Color to the Numbers: Top Cash Cow Stocks

Thanks to the Internet, and sites such as Yahoo! Finance and MSN Money, investors have more tools than ever to search for stock ideas by running screens. 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, for instance.

Just like the color-by-numbers books kids doodle on, the picture for stocks pulled from any screen isn't clear until we add the appropriate hues. In "Color to the Numbers," we enlist Motley Fool CAPS to take a deeper look at a screen for strong cash-flow stocks.

Better a screen than a window
In CAPS, investors can see how the collective community rates a company and can compare that rating with the opinions of the very best All-Star stock pickers -- CAPS players with a ranking greater than 80. There are even pitch commentaries and blogs to lend detail to the bull and bear opinions. In all, CAPS gives investors qualitative resources far beyond mere numbers and tables.

To run this screen, we'll use the following criteria:

• Market cap of at least $250 million
• Enterprise value-to-free cash flow ratio of less than 7.5
• 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 in terms of stocks with a business with a sizable and strong cash flow. 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.

Source: Yahoo! Finance, and Motley Fool CAPS as of Dec. 12.

Sleight of hand
What's this? A stock with a negative enterprise value-to-free cash flow ratio? Gee, that would mean that smartphone maker Palm has a negative enterprise value -- in other words, it's trading below the value of cash and short-term investments even after debt is considered. Virtually an investing no-brainer.

The problem is, the numbers don't tell the true story here. Palm carries at least $400 million in debt, a burden it took on recently when it recapitalized the company with Elevation Partners and issued shareholders a $9-per-share dividend. This debt and cash payment simply haven't shown up on reported financials yet, thus the errant screen results.

Tack on $400 million in debt, take into account the money received and paid out, and then compare the result with the $141.2 million in free cash flow over the trailing 12 months and you would get an EV/FCF ratio of about seven (assuming nothing else changed). Plus, that would have missed the screen in the first place because of having a too-low cash and equivalents level of about $400 million.

But many CAPS investors and a few Fool analysts even find this valuation generous, given the poor showing in last quarter's earnings and product delays underpinning the latest sneak attack on financial guidance. With all the operational problems plaguing the company, 118 of the 187 CAPS All-Stars rating the company have given Palm the thumbs-down.

Enduring the storm
Our lone five-star stock on the list is property and casualty insurer and Motley Fool Inside Value recommendation Endurance Specialty. The company is well-diversified across insurance categories, but always carries the risk of major disasters -- such as the tendency for major hurricanes to dent, ding, and otherwise level structures. To its credit, though, Endurance Specialty has often opted to swallow a low-growth pill and not renew business lines when pricing pressure lowers the premiums below what it considers a favorable risk level.

In the face of tepid growth, Endurance Specialty maintains compelling financials and a relatively low valuation, making it one of the best stocks to own. With intense price pressure coming from giants like AIG (NYSE:AIG) and Travelers (NYSE:TRV), the trailing-12-month return on equity of 24.4% from Endurance Specialty is impressive enough to have 59 CAPS All-Stars give the company the thumbs-up.

Let 77,000 investors be the judge
The collective wisdom of a huge pool of investors can quickly add color to a 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 even give your own opinion in Motley Fool CAPS.