This is the chart that got my interest and the idea behind finding the 3 stocks for this article.
While the time period of 1990-2009 is not recent, the idea is interesting.
The chart compares the stock performance based on 4 different drivers comparing the stock returns of top quartile performers over different time periods.
- Free cash flow
- Multiples
- Margin
- Revenue Growth
If holding for less than 1 year is your style, then focusing on multiples looks to be winner. However, my preference is to take note of the 5 and 10 year columns.
As a big follower and practitioner of free cash flow, it’s surprising to see that a small percentage of shareholder returns is a result of free cash flow over a longer time period. But what the chart does not show is the context in which FCF is used.
FCF as a metric is best used by investors to determine how healthy a company is. Not how much it can hoard. The companies that operate with big FCF margins are able to reinvest it into R&D and other avenues to further drive sales and profit. I like FCF to the foundation of sales and profit.
But sales and profit is flashier than FCF, and the market rewards that.
Seeing how FCF is not the focus of this chart, I’m going to go along with the ride and share 3 companies that have increased sales and profit nicely over 5 years.
The Screen Set Up
Here’s how I’m looking to find these outperforming stocks.
I’ve named this screen “Sales and Profit Seeker” with criteria of
- Sales 5YR CAGR between 30-300% as I’m looking for companies that have experienced a decent jump in sales.
- Gross Profit 5YR CAGR between 0-100% for profitable companies.
- Gross Profit to Assets (GPA) between 0.3 and 1.5. GPA is a measure of how much profit a company can extract from its asset base. The higher, the more efficient and profitable.
- FCF 5YR CAGR > 0%. I know, I know. I didn’t want to put it in, but it will help weed out companies that lose money or haven’t been able to reinvest.
- No OTC stocks for this experiment.
Sales & Profit Seeker #1: Lowe’s (LOW)
Home Depot (HD) is slightly higher than Lowe’s, but with the way Lowe’s is churning out sales and profit, there’s potential for greater long term returns.
Lowe’s shows up on the screen with the following numbers:
- Sales 5YR CAGR of 54.8%
- Gross Profit 5YR CAGR of 6.2%
- GPA of 0.62
- FCF 5YR CAGR of 9.1%
For such a large company, these are great numbers. As a side note, Home Depot did not make the list.
With the way the housing prices have continued to go up and more people are replacing appliances or upgrading their homes, Lowe’s and Home Depot hit the sweet spot in this economy.
Lowe’s is not a fast growth company, but combined with consistent fundamentals and quality checks, it’s a company that looks to continue its long term returns to shareholders.
In the image below, the Piotroski score averages a score of 6 or 7 with the rise in stock price starting in 2012.
There are two more two stocks that are richly rewarding shareholders…
