|New Threads Only:|
|New Threads & Replies:|
Forum List » Value Ideas and Strategies|
Share and discuss value investing ideas and investing strategies.
Criteria for Investing in Negative Free Cash Flow Stocks
Posted by: Mark Lin (IP Logged)
Date: December 13, 2012 09:29AM
I previously wrote about a controversial topic: investing in highly geared stocks. Today's topic is equally challenging; most value investing disciples will conveniently avoid stocks with negative free cash flow. As usual, there is always this little grey area for me where it comes to contentious issues such as buying stocks with negative free cash flow.
My criteria for considering stocks with negative free cash flow includes the following:
Positive Operating Cash Flow with One-Time Capex
Some companies may have consistent operating cash flow but have negative free cash flow in certain years, as they invest in capex to renew their plant and equipment. The nature of capital expenditures is a distinguishing factor in cases like this. Firms with recurring high maintenance capital expenditures should be avoided.
Companies in the Growth Stage with Future Free Cash Flow
While companies listed on the stock exchange are of a certain size, there are many of them still in the growth stage. It is understandable for such growth companies to invest heavily for future growth and generate negative free cash flow as a result. The key to analyzing such companies is to first ensure that they earn above their cost of capital; growth destroys value when the return on invested capital is below the cost of capital.
Cash Users with Asset Growth
Companies typically fall into one of the two categories: cash users and cash cows. The former category includes shipping, property developments and industrials, which need and use infinite amounts of capital. The latter category includes services, retail and distribution companies which throw off lots of cash flow each year. The cash users typically deliver negative free cash flow every year as they need to invest in capital expenditures to maintain and grow their business. In the case of the cash users, their value resides in the growth in assets, not free cash flow generation.
Stocks Discussed: SPY, DJI, QQQ,
Disclaimers: GuruFocus.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on GuruFocus.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The gurus may buy and sell securities before and after any particular article and report and information herein is published, with respect to the securities discussed in any article and report posted herein. In no event shall GuruFocus.com be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on GuruFocus.com, or relating to the use of, or inability to use, GuruFocus.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. The gurus listed in this website are not affiliated with GuruFocus.com, LLC. Stock quotes provided by InterActive Data. Fundamental company data provided by Morningstar, updated daily.