Although his much-publicized streak of beating the S&P 500 is over and lots of people question whether Legg Mason Value Trust's Bill Miller is truly a value investor, he's still one of the smartest money managers out there. It's a tough job to manage as much money as he does, and I think he does a good job of adding value.

Ever wonder how he does it? One way is by paying attention to free cash flow yields and how quickly those cash flows are growing. Purchasing undervalued growth is a great way to beat the market.

Free cash flow yield is free cash flow divided by the company's market capitalization. It measures the amount of cash flow available to equity shareholders relative to the value of that equity. The higher the yield, the less investors are paying for the cash flow.

If the yield is high and cash flow is growing, that's usually a recipe for success over time. More cash flow generation means more value. And paying a lower price than other investors gives us a way to generate excess returns. But I'll warn you now: Situations like this don't come around very often.

The screen
Fortunately, it's easy to screen for these situations. You simply take the free cash flow over the past 12 months and divide it by the current market capitalization. Then you look at how the cash flows have been growing for the past two to five years. I also like to look at the amount of share repurchases, because buybacks can be a sign that company managers think shares are cheap as well and are willing to gobble some up with shareholders' capital.

Here are the most interesting names I found using my screen.

Company Name

FCF Yield

FCF Growth

Share Repurchases



Very high


Clear Channel (NYSE:CCU)


Flat to slightly up


Xerox (NYSE:XRX)


Flat to down


Kohl's (NYSE:KSS)


See article


Viacom (NYSE:VIA-B)


Flat to up 5%


Johnson & Johnson (NYSE:JNJ)




Aeropostale (NYSE:ARO)




Data from Capital IQ, a division of Standard & Poor's, as of April 5.

Despite the huge yield and the stellar growth, auto-parts retailer CSK Auto is not firing on all cylinders. That's because the company is in the process of restating its past financial statements following an audit. The other thing, according to its most recent press release, is that management expects that the restatement will cost about $26 million. Ouch! Banging your knuckles like that will take off some skin, as well as a few points of yield. You can bet that I'll keep an eye out for that restatement, though.

The stock of terrestrial radio-station operator Clear Channel has risen nicely since spinning out its Clear Channel Outdoor. That could be from the "unlocking shareholder value" that gets attached to spinoff events. One might think that with a yield of nearly 8.5%, it's still undervalued. The same can be said about Xerox, a company whose management has worked hard to get back on track after the boom and bust of the technology bubble. But cash flows really aren't growing very quickly, and going by stock price, the market isn't expecting much future growth, either.

Kohl's is a special case. It recently sold its credit card receivables to JPMorgan Chase. The transaction inflates its free cash flow for the year, as the change in receivables got a big boost. However, it's only a one-time boost. Kohl's is still a quality retailer, but the results in the screen are a bit inflated.

Viacom is one of the kings of content. With a roster of franchises including MTV, BET, Nickelodeon, Paramount, and Comedy Central, to name a few, that shouldn't come as a surprise. It's grown organically and via acquisition, and cash flows have been on the rise. While I don't claim to be a content expert, the combination of a big yield, decent cash-flow growth, and a big share repurchase intrigue me. This may be one to learn more about, especially as returns on invested capital continue to creep up.

Johnson & Johnson could easily be confused with the Energizer bunny, the way it keeps going and going. The company has been growing its cash flows at about 10% per year for quite a while. Combine that with a 6.5% free cash flow yield and an expected growth rate of about 7%, and we get a lot of quality for our money.

Aeropostale is the most interesting name on the board, and I am not just saying that because I concentrate on the world of retail. Its stock price got whacked a couple of times during the year, when the market went into fits of depression. Still, the company outperformed expectations. And with a decent yield, growing free cash flow, and excellent returns on invested capital, Aeropostale is still one to consider today.

The Foolish bottom line
Miller hasn't relied totally on luck to outpace the market. He's done it by looking for companies that are cheap relative to the present value of their discounted cash flows. (Hey, isn't that a strategy value investors use?) Using free cash flow yields and growth rates is one way to find investment opportunities.

But screening alone is only part of the battle. As you can see, not all of the companies that look cheap are cheap. We need to be able to understand their competitive advantages and to determine how confident we are that those future cash flows will come in higher than those implied in today's stock price. There are no guarantees, but following Miller's lead of using free cash flow yields and growth rates can be a great place to start.

For more on how to find great bargains, check out:

Johnson & Johnson and JPMorgan Chase are both Income Investor recommendations. To find out how to beat the market using dividend-paying companies, sign up today for a free 30-day trial.

Retail editor and Inside Value team member David Meier is ranked 918 out of 25,744 participants in Motley Fool CAPS and does not own shares in any of the companies mentioned. You can view his TMF profile here. The Fool takes its disclosure policy very seriously.