3 Kings of Cash

Like most of us, if your first exposure to stocks is through watching rapidly scrolling tickers, stock-touting gurus, and television shots of hyperactive floor traders, it's easy to get the impression that stocks are only as good as their ability to do one thing -- go up! As Will Rogers said, "If it don't go up, don't buy it."

Well, buying stocks that go up makes sense in the same way that picking winning lottery numbers makes sense -- easier said than done. But unlike the lottery, in which there's no reliably proven way to pick the winners (email me if you've got one), long-term stock returns are indeed governed by a company's ability to spit back exactly what investors put at risk in the first place -- cash.

Investing, after all, is about putting money up front today to get more of it in return tomorrow -- at least, that's the goal anyway. Here at the Fool, we're firm believers that free cash flow, as opposed to traditional accounting earnings, is the best gauge of a firm's profitability (or lack thereof). You can learn more about the importance of free cash flow here.

Kings of Cash-a-lot
So with those cash flow lessons deeply engrained in your Foolish subconscious -- or maybe just bookmarked as a "favorites" page -- I'll begin a weekly column that highlights three cash-cow favorites of our Motley Fool CAPS community.

What I'll do is simply screen for companies with free cash flow-to-sales margins above 10% (also known as the Cash King Margin) that our community is overwhelmingly bullish about as well. The Cash King Margin is a good way to account for size differences among companies, rather than just using an absolute level of free cash flow.

So, let's not waste another second. Sound the trumpets! Here's ye first trio of Cash Kings from CAPS:

Of course, the last thing you should do is purchase any of these royal stocks based on the information found in this article alone. The stocks we highlight here are not formal picks, but rather suggestions worth further consideration. Aside from free cash flow, there's obviously a ton of other things investors need to consider, from the firm's valuation to the quality of its management. After all, due diligence is the Fool's way to riches.

But just for starters, here's a quick summary of the stories behind these cash-throwing stocks, and what some of our CAPS members are saying.

Down goes Pfizer!
Big pharma powerhouse (and Motley Fool Inside Value selection) Pfizer is the most proficient cash generator of the bunch, but the Dow Jones member has definitely been running into its fair share of problems. Most recently, Pfizer's stock plummeted more than 10% on Monday after the company announced a decision to discontinue the development of cholesterol drug (not the dinosaur) Torcetrapib.

However, because of Pfizer's sheer size, sales force, and huge competitive advantages that continue to make it a virtual cash machine, one CAPS player sees the current price as a great buying opportunity rather than something to be too stressed about.

According to prose976:

Wall Street is fickle on bad news. Pfizer is here to stay as long as we have a population of people who either need or think they need health care solutions. Down right now on bad news ... time to buy.

Modern Portfolio Recovery theory
Motley Fool Hidden Gems selection Portfolio Recovery Associates certainly got a boost in bullish CAPS votes yesterday, as fellow Fool Jim Gillies nominated it for Best Small Cap of 2007. Jim makes a convincing case. He cites, among other things, the debt collector's focused management, ample growth potential, and cash-spawning operating performance.

One Foolish CAPS resident, TMFPlatoish1, agrees:

From what I can tell, this is the best in class of the debt collection and recovery industry. They have remained extremely disciplined in their purchasing methodology and have shown the confidence to wade in and buy aggressively when the pricing was right.

Surgically placed intuition
Our last free cash flow king this week is Intuitive Surgical, maker of state-of-the-art surgical products and three-time Motley Fool Rule Breakers selection (I told you we adore free cash flow here at the Fool!).

The stock is up 138% since it was first recommended, on account of its revolutionary da Vinci Surgical System that provides surgeons with unprecedented range of motion and fine-tissue control. That also provides the company with a huge moat to fend off competitors and the ability throw cash like the proverbial king that it is. CAPS All-Star TMFBreakerDave sums it up here:

One of my favorite companies and stocks. Robotic technology enabling surgeons to perform with more precision than they could with their own hands, cost-effective for hospitals since patients recover faster and need less bed time, and increasingly chosen BY patients as consumers who want a better surgical choice.

The Foolish bottom line
Free cash flow-generating companies always dart straight to the top of my list as candidates that I'd like to research further. Our Motley Fool CAPS intelligence database is a great place to come up with new investment ideas, read what fellow Fools think, and even voice your own opinion about your favorite stocks. Click here to join the forward-thinking CAPS community free of charge.

That's all for this week, Fools! Be sure to join us next week, when I'll feature three more cash kings from CAPS. Until then, may your free cash flow grow, live long, and prosper.

Portfolio Recovery Associates is a Motley Fool Hidden Gems recommendation. Intuitive surgical is a Rule Breakers recommendation, and Pfizer is an Inside Value selection.

Foolish contributor Brian Pacampara holds no position in any of the companies mentioned. The Fool's disclosure policy always rules our kingdom.