The market is off to a decent start so far in 2007, but let's face the facts: We're actually in 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 we're in the midst of a "global bubble," and no wonder: The multiples of some hot properties do indeed appear stretched. Would you buy Abbott Laboratories (NYSE:ABT) at more than 50 times trailing-12-month earnings? How 'bout Schering-Plough (NYSE:SGP) and Comcast (NASDAQ:CMCSA) at their rich premiums?
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.
Wal-Mart (NYSE:WMT) and Tyco (NYSE:TYC) for example, currently clock in with P/Es below the broader market's, as do Chevron (NYSE:CVX) and 3M (NYSE:MMM). Thing is, for the 10 years that ended with April 2007, all of the aforementioned have delivered market-beating gains. Not coincidentally, they also boast solid track records of cranking out free cash flow (FCF).
FC what?
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 more than 6.5 percentage points since inception.
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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. Wal-Mart, Tyco, and 3M are all Inside Value recommendations. You can check out the Fool's strict disclosure policy right here.
