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If a company you ran was on a list like this, should you be pleased or upset?
Last weekend, Barron's published its annual Barron's 500 list of the top 500 publicly traded U.S. and Canadian companies and graded their performance for the past year. The list used three metrics to rank the companies: cash-flow-based return on investment for the past three fiscal years, cash-flow-based ROI for the past fiscal year, and sales growth for the past fiscal year.
Perhaps not too surprisingly, most of the companies I've picked for my Messed-Up Expectations portfolio showed up. Fortunately, most were near the bottom, even though pleasure might not be your first reaction.
Current FCF Growth Expectations*
|Dean Foods||331||$12.28||9.6% / 4.8% / 0%|
||207||$15.26||3.3% / 1.6% / 0%|
||333||$25.93||7.5% / 3.8% / 0%|
|Hertz Global Holdings||382||$16.77||(5.6%) / (2.8%) / 0%|
||1||$30.08||46.7% / 23.4% / 2.5%|
||468||$67.48||10.8% / 5.4% / 0%|
||482||$10.94||(21.3%) / (10.6%) / 0%|
||496||$24.81||4.8% / 2.4% / 0%|
||6||$38.45||11.6% / 5.8% / 0%|
*Presented in the format of annual growth rates for the next five years, the following five years, and then terminal growth rate, discounted at my usual 15% hurdle rate. Rates are what is required to make the output of a DCF model match the recent share price.
Why am I happy that most showed up in the lower half of the list?
Well, the question to ask is, how should management react to a company's ranking in this list? Should Charles Szews, CEO of Oshkosh, be happy for making the No. 1 ranking, or worried that the only direction available is down if concerns over military spending come true? Those high, priced-in growth expectations come from having generated just $38.4 million in free cash flow over the past four quarters.
Conversely, should Transocean CEO Steven Newman be disappointed over last year's results and ranking, or excited about the opportunity? Having listened to the most recent conference call, I think he's feeling much more the latter. In fact, I just purchased some more shares.
Barron's even calls out this tension in its article. "While ranking high in our survey signals success, bringing up the rear could mean opportunity." The ranks, obviously, are backward-looking. Considering that my investment methodology is looking at current expectations and judging whether the market is too pessimistic looking forward, I come down on the side of "opportunity."
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The Fool owns shares of all of the companies mentioned in this article. Motley Fool newsletter services have recommended Ford, buying calls in SUPERVALU, and writing covered calls in GameStop. Try any of our Foolish newsletter services free for 30 days.
Fool analyst Jim Mueller owns shares of Transocean and Ford, and has an options position on Ford, but has no position in any other company mentioned in the article. He works for the Motley Fool Stock Advisor newsletter service. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool's disclosure policy is never messed up.