Favorite Benchmark Meets Academia

One of my favorite metrics for evaluating whether a security is trading below or near its potential value is Price to Cash Flow from Operations (P/CFO). The ratio of price to cash flow is a simple way to provide some insight into value – Cash is King.

In a recently published academic report Aswath Damodaran, of New York University Stern School of Business, identifies additional performance measures for return of capital. In particular, Damodaran’s measure estimates the return of existing assets.

Return of Capital = Operating Income x (1 – Tax Rate) / Fixed Assets + Current Assets – Current Liabilities - Cash

Similar to the P/CFO metric, this benchmark isolates only the assets related to the core business income generating assets, working capital. This eliminates (essentially) the effect of investing and financing activities. Please note, Damodaran covered multiple accounting and cash metrics in his publication, as I only selected the one particular metric that appealed to me the most.

To combine these metrics I established a stock screen with the following criteria: Market Cap of less than 10 billion - in order to eliminate the Danny Almontes of securities, Price to Cash Flow of less than 10 and Revenue Growth (Current Year and Next Year) greater than 50%.

The selected criteria serves as a starting point by targeting mid cap or smaller securities with a low price to cash flow and significant revenue growth. In other words, a smaller company with solid growth prospects trading at a discount.

The screen identified 15 securities. Keeping only the securities with positive earnings, the following six securities were identified:

Symbol, Company Name, Price/Cash Flow, Return of Capital
CYH, Community Health Systems , 5.9x, 4.56%
STSA, Sterling Financial Corporation, 7.3x, 103.44%
SWSI, Superior Well Services, Inc., 7.5x, 23.93%
CHCG, China 3C Group, 8.2x, 131.23%
ANDE, The Andersons, Inc. ,8.6x, 12.35%
SORL, Sorl Auto Parts, Inc. ,9.9x, 9.34%
**Information provided by Etrade & Yahoo Finance for YTD (Income) & Q3 (Balance Sheet).

The end results are dirt cheap stocks with real working capital income. The lineup includes a hospital, Community Health Systems (CYH). Sterling Financial Corp (STSA) operates over 150 regional banks. Superior Well Services (SWSI) provides well-site solutions to oil and natural gas companies. China 3C Group (CHCG.OB) integrates the selling and distribution of 3C Products. Andersons, Inc. (ANDE) operates in the agriculture and transportation market. Sorl Auto Parts (SORL) is self explanatory.

Finally, I believe these two metrics provide an inside look at how effectively management is using their current investments to generate income. Personally, I will add all of these stocks to my watch list for potential future investment considerations and will provide further follow-up at a later date. Please use this listing at your own discretion. I recently came across Damodaran’s publication and was excited to see it in action. Hopefully, this made more sense then Lou Holtz’s pep talk to the Knicks.

Disclosure: Two-4-the-Money currently has no position in any of the stocks mentioned above but positions can change at any time.