5 Stocks Making Cash

Had Jerry Maguire been an investor instead of a fictional sports agent, he might have become famous for yelling, "Show me the cash flow!"

Earnings come and go, and the green-eyeshade types can legally manipulate them to mask a company's true operations. Yet its ability to generate cash -- what comes in the register and goes out the door -- remains the preeminent indicator of company's worth. In short, cash is king.

Below, we'll look at companies that have proven themselves prodigious generators of free cash flow (FCF) -- the amount of money a company has left over that it could potentially pay to its investors. We'll find companies that have generated compounded free cash flow growth rates exceeding 25% annually over the past five years, then pair them with the opinions of the more than 140,000 members of the Motley Fool CAPS investor intelligence community, to see which ones might have the best chance of outperforming the market.

Sources: Capital IQ, a division of Standard & Poor's; Motley Fool CAPS. CAGR=compounded annual growth rate.

Generating copious amounts of cash doesn't make a company an automatic buy. But having looked at Enron's cash flows instead of its earnings would have saved many investors a lot of grief. Warren Buffett, for one, understands that the value of a company today is calculated by its discounted future cash flows, so use this list as a jumping-off point to dig deeper into the piles of cash.

Ka-ching!
Unlike the growth enjoyed by Taser (NASDAQ:TASR), which caters to law enforcement, the view from the analyst community seems to suggest that the only reason Sturm, Ruger and Smith & Wesson Holdings (NASDAQ:SWHC) enjoyed a run-up in sales is because of fear and paranoia. Gun owners believed the Obama administration, upon seizing the reins of power in Washington, would reinstate the assault weapons ban and close the so-called "gun show loophole." As a result, they ran out and stocked their arsenals with assault rifles.

Fortunately for gun owners, though, the contentious battles being waged over the economy, our financial institutions, and health care haven’t left enough time in the day to tackle gun control, too. With the initial wave of fear subsiding, we can now expect gun sales to plummet.

While such analyses may highlight the analysts' own biases, they shouldn't be completely dismissed out of hand. No doubt some paranoia did play into the sales surge, but it's not the whole story. It ignores how modern hunting rifles were growing in popularity long before Obama became president. Smith & Wesson reported in its 2007 annual report that the tactical "black rifle" was the fastest-growing segment in the long gun market.

On the other hand, the "gun show loophole" argument disregards the very large backlog that remains for background checks conducted by the FBI before sales can be completed. While down from the peak recorded in the fourth quarter, they're still well above the year-ago period. This is not an exact proxy for sales, but it is a common measure of retail demand. It shows that people are not trying to circumvent the rules and regulations in place, and still very much want to buy a weapon.

Gun sales no doubt grew for reasons having little to do with fearful "gun-grabbers" and more because of self-defense and sport. This tale is more about the health of the economy (gun sales tend to rise in a recession) and means Ruger and Smith & Wesson may witness sustained demand far longer than the analysts are willing to credit.

Highly rated CAPS All-Star MagicDiligence is one of those who believes sales are going to evaporate, but argues that the recent drop in price experienced by Ruger makes it attractive:

Sturm Ruger is one of the U.S.'s largest firearms makers. The recent firearms "bubble" is bursting, but Ruger still looks somewhat cheap.

I also get the sense that Ruger is undervalued here, and I believe there are still further opportunities for growth that are being ignored. I've headed over to Sturm, Ruger’s CAPS page and rated it to outperform the market. Tell me in the comments section below whether you agree with the gunsmith's prospects, and then join me on CAPS to add your rating there, as well.

Follow the money
While these stocks have left a trail of dollars, it pays to start your own research on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made -- all from a stock's CAPS page. Head over to the completely free CAPS service and let us hear what you've got to say about these or any other stocks you think will continue rolling in the dough.