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

They're 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. Alas, our "like" sometimes becomes 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 valuations and growth prospects.

Google (Nasdaq: GOOG  ) is a classic example. Don't get me wrong: I love it like everyone else, 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 price-to-earnings ratio of more than 40).

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 fellow Fool Philip Durell's philosophy of finding companies with lengthy track records at generating plenty of free cash flow (FCF).

Google's FCF track record is too short -- particularly when the market boasts the likes of AT&T (NYSE: T  ) , Verizon (NYSE: VZ  ) , and Procter & Gamble (NYSE: PG  ) -- which have cranked out gobs of FCF over the course of many years.

Sure, 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 General Electric (NYSE: GE  ) and Yahoo! (Nasdaq: YHOO  ) -- two more of the market's proven cash generators.

Why are you waiting?
Just because a company makes it through a set of quantitative screens, that doesn't mean it's a slam-dunk investment. There's more to ferreting out value than just number crunching. That's 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.

If that sounds like a compelling strategic two-step, I encourage you to take Inside Value for a 30-day test drive. A free trial won't cost you a thing, and you'll have access to every one of his recommendations, as well as his top five stocks to buy now. Here's more information.

This is adapted from a Shannon Zimmerman article originally published on Aug. 5, 2006. It has been updated.

Rex Moore is an analyst for Stock Advisor, and at the time of publication he owned shares of Procter & Gamble. You can check out the Fool's strict disclosure policy by clicking right here.

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