The market is off to a slow start so far in 2007, but let's face the 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. Would you buy Biogen
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." That's a sobering thought, but 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 beaten the market by roughly 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.
This article was originally published on Feb. 17, 2007. It has been updated.
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. Dow and Johnson & Johnson are Motley Fool Income Investor picks. Biogen is a Stock Advisor choice. You can check out the Fool's strict disclosure policy right here.