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 is never equal. Nonetheless, those two points are well worth remembering as you go about the business of choosing quality stocks.
They're particularly true 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 valuation 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. I also love the bells and whistles it rolls out on a constant basis.
Still, fan though I am, I can't bring myself to buy the stock at its current valuation (for starters, I don't think its declining growth justifies a P/E ratio in the high 30s).
When it comes to investing in individual stocks, it just makes sense that companies trading well below their "intrinsic value" are extremely attractive. Beyond that, I like fellow Fool Philip Durell's philosophy of finding firms with lengthy track records at generating plenty of free cash flow (FCF) -- cash from operations minus capital expenditures.
On that front, Google's FCF track record is too short -- particularly when the market boasts stalwarts such as Anheuser-Busch
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 Cisco
To be sure, just because a company makes it through a set of quantitative screens 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 Philip's newsletter service.
Each month, he 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).
If that sounds like a compelling strategic two-step, I encourage you to take Inside Value for a 30-day test-drive. The free trial won't cost you a thing, and you'll have access to every one of his recommendations, as well as his top five stocks to buy now. Here's more information.
This is adapted from a Shannon Zimmerman article originally published on Aug. 5, 2006. It has been updated.
Of the companies mentioned above, Rex Moore owns shares of Anheuser-Busch. Best Buy, Wal-Mart, and 3M are Motley Fool Inside Value recommendations. Anheuser-Busch is a former Inside Value recommendation. Best Buy is also a Stock Advisor recommendation. The Motley Fool owns shares of Best Buy. You can check out the Fool's strict disclosure policy right here.