Free cash flow is a measure of how much cash a company is generating after capital expenditures. One standard measurement of free cash flow is to compare it to a company’s market cap, known as price / free-cash-flow (P/FCF).
It’s a good way to tell how much cash is available to generate new business, enter new business lines, pay dividends, or even reduce debt. It can tell you if management has options to be innovative with the company, or if they’re struggling just to stay afloat.
This can be very important for a small or micro-cap company where there may be a fear of running out of cash. These three small and micro-cap stocks are executing well, judging by their stock behavior, and they have great P/FCF ratios.
You may never have heard of Sequential Brands Group, Inc. (NASDAQ: SQBG), but you have definitely heard of some of the brands they manage. Brands like Martha Stewart, Emeril Lagasse, and Jessica Simpson are all owned and managed by Sequential.
The company purchases a brand that is already established and then uses its team of marketing and branding experts to monetize and optimize the brand. The company has a strong P/FCF of 4.77. (The current P/FCF for the S&P 500 is around 11.50.)
The stock has been recovering this year after a poor showing in 2017. But trading at $2.11, the stock is still below book value of $4.47 a share, and has a forward P/E of only 3.14. With Martha Stewart launching a new book series in early 2019, now may be the time to plant some Sequential in your portfolio.
As the tariff wars heated up earlier this year Controladora Vuela Compania de Avicion, S.A.B. de C.V., or Volaris (NYSE: VLRS) a Mexico-based airline, took a major hit. The stock fell hard on an earnings release in late April, but has been on a hot streak in the month of July, rising over 48%.
Volaris is generating cash using its low cost airline model, and has a P/FCF ratio of only 5.28. Management is projected to grow earnings 147% next year.
By continuing to reduce costs, and remain the low cost provider in the Mexican market, Volaris appears to be climbing out of the hole the stock found itself in earlier this year.
Finally, let’s look at a technology stock that has more than doubled this year, is in one of the hottest emerging tech areas around, and has a P/FCF ratio of 8.1. Immersion Corp. (NASDAQ: IMMR) makes and licenses haptic technology, or touch and feedback tech, used in mobile phones and virtual reality gear.
Immersion has been a leading player in the mobile phone and gaming market, and has recently signed two automotive deals with Panasonic and Calsonic Kansei.
As a player in this rapidly expanding space you might expect a high valuation. But, combined with the great cash flow numbers, the growing company has a P/E of only 8.86. The stock has pulled back recently giving investors a chance to get in off the highs set earlier this year.
Free cash flow is a great way to see how your companies are doing when it comes to generating the resources necessary to grow and be nimble competitors. Sequential, Volaris, and Immersion are three very different companies that have all found a way to ensure they have the cash necessary to thrive.
Disclaimer: The author and Spotlight Growth has no positions in any of the stocks mentioned in this article. Nor does either party currently have any relationship, or any other conflicts of interest, with any of the companies mentioned in this article. This content is meant for informational and entertainment purposes only and should not be meant as a recommendation to buy or sell any securities. Please visit a licensed financial representative to determine what investments are right for you.
Article By: Steven Adams