Investing 101: Ideas to Trade Cash Flows and Profitability

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(List compiled by Alexander Crawford and Danny Guttridge. Profitability data sourced from Fidelity, operating cash flow/common equity sourced from Screener.co, all other data sourced from Finviz.)

We often hear in the news when companies report their earnings (a.k.a. profits) for the latest quarter, but we don’t often hear about company cash flows. This is unfortunate because cash flows are a very important indicator of performance.

After all, cash flows keep a company running.

Analysts often prefer to use cash flows over profits as an indicator of value for one primary reason: to calculate profits, management must make many estimates such as when expenses occurred or when revenues were earned, whereas cash flows are very hard to manipulate. A number on a bank statement is factual, while profits are estimated.

Moreover, as mentioned before, cash flows actually keep a company running. Theoretically, a company can have positive profits with negative cash flows and fail to survive.

Of course, each measure of performance is important in its own right, and the best analysis would involve both profitability and cash flows.

With this idea in mind, we ran a screen on highly profitable stocks, beating their industry peers on gross, operating, and pretax margins. We screened these companies for those that have seen growth in operating cash flow/common equity, comparing the trailing-twelve-month (TTM) ratio to the company’s five-year average.

A closer look at the terms used above:

-Gross margin  is (Sales – Cost of Sales)/Sales 
-Operating margin  is (Sales – Cost of Sales – Operating Expenses)/Sales
-Pretax margin  is (Sales – all expenses except taxes)/Sales
-Common equity  is the historical investment from shareholders (at the time shares were issued) plus all earnings that have been reinvested into the firm

Do you think these companies are performing well? Use this list as a starting-off point for your own analysis.

Analyze These Ideas (Tools Will Open In A New Window)

1. Access a thorough description of all companies mentioned
2. Compare analyst ratings for all stocks mentioned below
3. Visualize annual returns for all stocks mentioned

1. Netflix, Inc. (NFLX): Music & Video Stores Industry. Market cap of $13.51B. TTM gross margin at 55.92% vs. industry gross margin at 38.03%. TTM operating margin at 13.66% vs. industry operating margin at 9.22%. TTM pretax margin at 13.14% vs. industry pretax margin at 8.33%. TTM operating cash flow/common equity at 1.34 vs. 5-year average at 0.86. After a solid performance over the last year, NFLX has pulled back during recent sessions. The stock is 8.43% below its SMA20 and 4.42% below its SMA50, but remains 16.13% above its SMA200. The stock has gained 146.34% over the last year.

2. Limited Brands, Inc. (LTD): Apparel Stores Industry. Market cap of $11.0B. TTM gross margin at 42.16% vs. industry gross margin at 38.24%. TTM operating margin at 13.86% vs. industry operating margin at 9.84%. TTM pretax margin at 13.26% vs. industry pretax margin at 9.23%. TTM operating cash flow/common equity at 0.85 vs. 5-year average at 0.43. It's been a rough couple of days for the stock, losing 6.56% over the last week.

3. Cellcom Israel Ltd. (CEL): Wireless Communications Industry. Market cap of $2.51B. TTM gross margin at 61.98% vs. industry gross margin at 60.05%. TTM operating margin at 29.95% vs. industry operating margin at 20.82%. TTM pretax margin at 25.12% vs. industry pretax margin at 14.66%. TTM operating cash flow/common equity at 6.06 vs. 5-year average at 2.24. Might be undervalued at current levels, with a PEG ratio at 0.74, and P/FCF ratio at 12.68. It's been a rough couple of days for the stock, losing 5.47% over the last week.

4. Strayer Education Inc. (STRA): Education & Training Services Industry. Market cap of $1.43B. TTM gross margin at 63.60% vs. industry gross margin at 54.18%. TTM operating margin at 31.52% vs. industry operating margin at 22.02%. TTM pretax margin at 31.44% vs. industry pretax margin at 18.33%. TTM operating cash flow/common equity at 1.22 vs. 5-year average at 0.60. The stock is a short squeeze candidate, with a short float at 23.08% (equivalent to 9.66 days of average volume). It's been a rough couple of days for the stock, losing 19.55% over the last week.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks

Referenced Stocks: CEL , LTD , NFLX , STRA

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