If you're a regular reader of the Fool -- and shame on you if you're not! -- you've heard us mention the words "competitive advantage" a few hundred thousand times when describing our favorite stocks. That's because finding companies with durable competitive advantages is one of the cornerstones of sound investing.
When a business is able to protect itself from the damaging effects of intense competition, it also gives itself a greater chance to generate the one thing that matters to shareholders -- cash.
A Fool's guide to free cash
Investing, after all, is about putting money up front today to get more of it in return tomorrow. Here at the Fool, we're firm believers that free cash flow, as opposed to traditional accounting earnings, is the best gauge of a company's profitability -- or lack thereof.
So with those cash flow lessons deeply engrained in your Foolish subconscious -- or maybe just bookmarked as a "favorites" page -- I'll highlight three cash-cow favorites of our Motley Fool CAPS community.
I'll simply screen for companies with free cash flow-to-sales margins greater than 15% -- 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.
Cash Kings rule everything around them
Unlike companies such as LG. Philips
So, let's not waste another second. Sound the trumpets! Here's another trio of cash kings from CAPS.
|
Company |
Cash King Margin (TTM) |
CAPS |
CAPS |
|---|---|---|---|
|
Taiwan Semiconductor |
28.94% |
249 |
8 |
|
Symantec |
22.12% |
163 |
33 |
|
Novartis |
21.19% |
266 |
7 |
As always, don't consider these stocks as formal picks but rather as suggestions worth further investigation. 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 kings and what some of our CAPS players think about them.
Founder of the foundry
With a whopping free cash flow-to-sales margin of more than 25%, Taiwan Semiconductor takes the honors as this week's most prolific cash king. As the world's largest semiconductor foundry, this is one king with the massive power, size, and efficiency to pursue a low-cost strategy -- and win handily.
As fellow Fool Will Frankenhoff points out in his analysis, the Hsinchu-based royal majesty owns nearly 50% of foundry market share and operates 10 fabs, which are extremely costly to produce. This essentially gives Taiwan Semiconductor the large moat required to protect any cash-generating grand castle.
CAPS All-Star TMFMileHigh is another fellow Fool who gives this king his loyal support:
"The world's largest chip foundry -- that is, it manufactures chips but doesn't design them -- easily beat recent earnings estimates and is earning more from PC sales due to its proximity to Asian producers. It sports a market-crushing yield, a very low P/E relative to competitors, and gets financial help from the gov't of Taiwan. Sign me up."
This king's throne is secure
Symantec, best known for its Norton antivirus software, is another powerhouse that uses its girth and dominant market position to benefit shareholders. After merging with Veritas in 2005, Symantec became the undisputed leader in the potent Internet-security market -- which is just part of the reason it became a Motley Fool Inside Value recommendation.
And though it has taken a while for the two companies to fully integrate, Symantec has just recently started to reap the benefits of the merger. In addition to its sheer size, this cash king is slowly but steadily gaining the international reach that should keep it atop the security software kingdom.
Conscientious is one CAPS citizen who is completely secure with where this leader is headed:
"As Internet technology advances, so does the need to secure networks and provide top notch protection against viruses and other malicious logic. As long [as] Symantec stays on top of that game as they have for past years their stock will continue to climb."
A general of generics
Our last free cash flow king this week is Novartis, one of the world's leading and most esteemed pharmaceutical companies. In fact, Hay Group recently named this highly respected monarch as the No. 2 most admired pharmaceutical company in the world, behind Johnson & Johnson.
Novartis leverages its truly unique position as a leader in both generic and patented pharmaceuticals to keep the cash rolling in. Currently, Novartis is more attractive than its big-pharma peers because the generic side of its business acts as a natural hedge to looming patent expirations -- all while its pipeline of patented drugs remains promising.
It's that type of market position and diversification that makes Novartis a favorite in our CAPS community. Participant weiwentg is one of many CAPS players who faithfully bows to the great Novartis:
"Novartis is one of the best-run big pharma companies. It operates in branded and generic pharmaceuticals, with few patent expirations on the horizon. It's got a very defensible economic moat."
The Foolish bottom line
Free cash flow-generating companies like Taiwan Semiconductor, Symantec, and Novartis are always among my top candidates to research further. Our Motley Fool CAPS intelligence database is a great place to look for your own cash kings, read what fellow Fools think, and even voice your own opinion about your favorite stocks. You can 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 yield prosperous returns.
Fool contributor Brian Pacampara searches for free cash on sandy beaches but holds no position in any of the companies mentioned. Symantec is an Inside Value selection. Johnson & Johnson is an Income Investor choice. Martha Stewart Living is a former Stock Advisor pick. The Fool's disclosure policy always rules Fooldom.
