The market is off to a slow start so far in 2007, but let's face facts: We're actually entering the fifth year of a solid bull run, a lengthy stretch of time by historical standards. Indeed, as I suggest here, at least one market maven worth taking seriously thinks now is a fine time to be cautious, and no wonder: The multiples of some hot properties do indeed appear stretched thin. Would you buy Google
Listen to a luminary
As investing legend Peter Lynch explains in One Up on Wall Street, one way of thinking of a company's price-to-earnings (P/E) ratio is "as the number of years it will take the company to earn back the amount of your initial investment." With that in mind, the prices of those market race cars are just too rich for my blood.
Yours, too? Not to worry. Even this far into a bull market, there are plenty of bargains to be found -- and 2007's tepid start has only helped to create more.
Free cash flow is the number you arrive at when you add up a company's cash from operations and subtract its capital expenditures. As measurements of fiscal health go, it's one of the more reliable -- certainly more so than earnings, which, alas, are susceptible to all manner of accounting gimmickry.
Not coincidentally, FCF is one of the main metrics my colleague Philip Durell works with at the Fool's Inside Value investing service. Philip is on the lookout for solid but "deeply undervalued companies," firms with discounted valuations that are loaded up with market-beating potential. And on that front, so far so good: Taken collectively, his list of recommendations has bested the market by 7 percentage points since inception.
If you'd like to learn more about value investing -- or if you just want to sneak a peek at the stocks that have made the Inside Value cut -- click here and a risk-free guest pass is yours for the taking. You'll have 30 days to peruse a service designed to show you how to put a battle-tested piece of investment advice -- buy low, sell high -- to use in your own portfolio without muss or fuss. Check it (for free) and see.
Shannon Zimmerman runs point on the Fool's Champion Funds newsletter service and co-advises Motley Fool Green Light with his pal Dayana Yochim. At the time of publication, he didn't own any of the securities mentioned above. Amazon.com, Best Buy, and Dell are Stock Advisor recommendations. Dell is also an Inside Value pick. You can check out the Fool's strict disclosure policy by clicking right here.