Please ensure Javascript is enabled for purposes of website accessibility

Great Company, Lousy Investment

By Shannon Zimmerman - Updated Nov 11, 2016 at 4:54PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Don't invest if the price isn't right.

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 is never equal. Nonetheless, those two points are well worth remembering as you go about the business of choosing quality stocks.

They're particularly true 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 kindles into 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 valuation and growth prospects.

Google is a classic example. Don't get me wrong: I love it, too, 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 don't think its valuation profile -- particularly its market-shellacking price-to-sales multiple -- is currently justified.

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 to find firms with lengthy track records at generating plenty of free cash flow (FCF) -- cash from operations minus capital expenditures.

On that front, Google's FCF track record is too short -- particularly when the market boasts the likes of Wal-Mart (NYSE:WMT), Procter & Gamble (NYSE:PG), Johnson & Johnson (NYSE:JNJ) and Pfizer (NYSE:PFE). Each of those concerns has cranked out loads of FCF over the course of many years, and despite that impressive achievement, they're still more attractively valued than Google.

Admittedly, 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 Apple (NASDAQ:AAPL), Nokia (NYSE:NOK), and Amgen (NASDAQ:AMGN). Each boasts a longer history of cranking out FCF and P/Es closer to the broader market average than Google's.

Digging deeper
To be sure, just because a company makes it through a set of quantitative screens doesn't mean it's a slam-dunk investment. There's more to ferreting out value than just hindsight number-crunching, after all, which is why we focus on our picks' forward-looking prospects.

At the Fool's new Ready-Made Millionaire, a real-money, $1 million portfolio, we've cherry-picked a compact set of companies that fit the profile of future winners. Each is profitable, poised to grow earnings at a very healthy clip, and managed to maximize shareholder value.

If a laser-like focus on value and growth sounds like a compelling strategic two-step, I encourage you to learn more about the service -- which will open to new members early next year -- and snag our special report, The 11-Minute Millionaire. The report won't cost you a thing, and we'll notify you just as soon as Ready-Made reopens, too. Call it a two-for-one. Click here to get started.

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

Shannon Zimmerman runs point on Ready-Made Millionaire and doesn't own shares of any of the companies mentioned. Google is a Motley Fool Rule Breakers selection. Wal-Mart, Pfizer, and Nokia are Inside Value choices. Pfizer and Johnson & Johnson are Income Investor picks. Apple is a Stock Advisor selection. The Motley Fool owns shares of Pfizer. The Fool has a strict disclosure policy.


Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$129.82 (0.96%) $1.24
Apple Inc. Stock Quote
Apple Inc.
$168.49 (-0.44%) $0.75
Nokia Corporation Stock Quote
Nokia Corporation
$5.21 (0.00%) $0.00
Johnson & Johnson Stock Quote
Johnson & Johnson
$167.14 (-2.07%) $-3.53
Pfizer Inc. Stock Quote
Pfizer Inc.
$48.29 (-3.32%) $-1.66
The Procter & Gamble Company Stock Quote
The Procter & Gamble Company
$145.26 (-0.71%) $-1.04
Amgen Inc. Stock Quote
Amgen Inc.
$248.35 (-1.48%) $-3.74

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/12/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.