Growing Rich - Arabictrader.com

GROWING RICH WITH GROWTH STOCKS
Accounting is always very important.” Bramwell puts little weight
on a stock’s price-to-book value ratio, arguing that with companies
constantly buying back and issuing new shares, this number isn’t as
important as it once was. Instead, she pays particular attention to
return on capital.
SCREENING FOR FREE CASH
Shelby Davis is starting to use his computer more than he used to.
But he’s not running momentum screens in search of today’s “hot”
stocks. Instead, he employs it to analyze and create spreadsheets on
the companies he owns and follows. “What I’m really doing is examining
various key variables to see what kind of job management is doing,”
he reveals. “How much free cash flow are they generating? How
much capital do they need to plow into the business to make it grow?
What’s the maintenance capital spending? If they’re generating free
cash flow, what are they doing with it? Are they buying back stock?
Are they acquiring other companies? Are they using it to make the
business grow even faster? I want to know these things.”
If company executives ask for his advice, which they sometimes
do, Davis tells them to put any extra cash back into the business.
“There’s been a big change since the Cold War ended and the iron
and bamboo curtains came down,” he offers. “A lot of companies
generating free cash flow now have investment opportunities all over
the world. The world suddenly grew five times bigger, from one billion
to more than six billion potential customers. It was a huge sea-change
secular event, and we’re reaping the peace dividend of it right now.”
What management does with any free cash flow gives Davis a good
indication of how well they are running the company for stockholders
and whether or not they’re thinking like owners. They weren’t in the
1960s, when Davis first started in the investment business. “They
were thinking like bureaucrats, sitting on top of companies with lots
of internal perks, country club memberships, and all those kinds of
things,” he reflects. “That’s one good result of the leveraged-buyout
boom. It forced companies to focus on cash flow, become more efficient,
and concentrate on their core businesses. Companies were being
taken over by financial buyers who would strip them down to the
core and, through the use of leverage, get an enormous return if they
were right, because they would buy the company on 85 percent debt.
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