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 isn't equal. Nonetheless, those two points are well worth bearing in mind as you go about the business of stock shopping for fun and profit.
They're particularly true, I'd argue, when it comes to the question of price.
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 valuations 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 at least. And while I'm not exactly an early adopter when Google rolls out new bells and whistles, there are a few to which I've taken a shine. I've been having a blast with Google Scholar, for instance, which is a great way to see what academics in myriad fields are up to these days. The finance service seems impressive, too, and while I won't be chucking Outlook anytime soon, Google Calendar ain't too shabby, either.
Still, fan though I am, I wouldn't touch Google's shares, not at a price-to-earnings ratio that hovers above 40.
When it comes to investing in individual stocks, I'm a big fan of companies whose intrinsic value clocks in considerably greater than their stock prices. Beyond that, I also like firms with lengthy track records of generating plenty of free cash flow (FCF) -- cash from operations minus capital expenditures -- and shares trading on the cheap.
On that front, Google's FCF track record is too short -- particularly when the market boasts the likes of Eli Lilly
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 Dell
Why are you waiting?
To be sure, just because a company makes it through a set of quantitative screens, that doesn't mean it's a slam-dunk investment. There's more to ferreting out value than just number crunching, after all. That's why I'm a big fan of my colleague Philip Durell's Inside Value newsletter service.
Each month, Philip whittles down the investment universe to just those companies that meet his stringent quantitative requirements and measure up when it comes to more qualitative factors (such as managerial acumen and a laser-like focus on creating value for shareholders) as well.
Shall we dance?
If that sounds like a compelling strategic two-step, I encourage you to take Inside Value for a test drive. It won't cost a thing for a full 30 days, a stretch of time you can use to read through Philip's complete list of recommendations, every inch of financial advice he's offered subscribers, and the service's members-only discussion boards, too. So click here to grab your guest pass and learn how to cherry-pick great investments from the ranks of the market's great companies.
This article was originally published on Aug. 5, 2006. It has been updated.
At the time of publication, Shannon Zimmerman didn't own any of the securities mentioned above. Eli Lilly is an Income Investor recommendation. Dell and Microsoft are Inside Value selections. Dell is also a Stock Advisor pick. You can check out the Fool's strict disclosure policy by clicking right here.