Top 10 music videos of the month: Making Easy Money

New to the investing game and interested in learning some metrics that can help you analyze a company’s prospects? If so, this can be a great place to start your education.

To create the list of stocks below we have pulled together several financial analyst metrics to find companies with bullish indicators. Each term is defined in detail to help you perform your own analysis.

In making this list we focused on cash flow growth - arguably one of the most important considerations in the financial analysis of a company. While earnings and net worth are subject to management estimates, cash flow is very difficult to alter.

We wanted to search for companies exhibiting positive trends in cash flow growth. We began by screening for those companies that also had a high compound annual growth rate (CAGR) in free operating cash flow (above 20%) for the past 3 years. We then focused on the names that remain significantly undervalued to their mean analyst target price.

These companies also have higher earnings before interest, taxes, depreciation and amortization (EBITDA) than debt for the last year. Lastly, we narrowed down our list by those experiencing significant increases in institutional buying over the current quarter.

Don’t fully understand these terms? Let’s take a look at what each of these metrics mean and why they are important:

Compound Annual Growth Rate - CAGR
This is the year-over-year growth rate of an investment over a given time. In this article, we used CAGR with Free Operating Cash flow (see below). When a company has a high Free OCF growth rate, it means the company has become increasingly efficient in generating cash from the running its business.

Free Operating Cash Flow
Free operating cash flow (FOCF) is the total operating cash flow minus all operating expenditures, such as wages, repairs, and depreciation. Strong free cash flow signals a company's ability to pay debt, dividends, and invest in their business growth.

Institutional Buying
Institutional investors are also known as "big money" investors or managers. They represent big pools of money such as investment banks, pension funds, mutual funds, hedge funds, endowment funds, etc. When they invest in stocks, they can invest hundreds of thousands of dollars or more at one time.

Regular investors pay attention to what institutional investors do because it is easy enough to assume that the big money managers know what they are doing -- or at the very least know more than the average investor. This is why these investors are also sometimes referred to as "smart money.” Note, investors should never blindly trust analysts or institutional investors or anybody else. Use information on institutional investing with other research before making any investing decisions.

Earnings before interest, taxes, depreciation and amortization (EBITDA)
This is an indicator of financial performance calculated as: Revenue – Expenses (excluding tax, interest, depreciation and amortization). Usually it is used as a proxy for what is available to pay interest. It is useful to compare EBITDA to debt, as EBITDA is earnings available before paying off interest on debt.

Target Price
Analyst target prices can be very useful guides for investors. The target price is a price level set by analysts that, based on their data and estimates, represents their predictions for that company in the upcoming year. Because analysts often have different opinions, we use the average analyst target price.
Although target price is upwardly biased, a steep discount from this number can indicate an undervalued opportunity.

Given the data points, do you think these companies are undervalued? Are institutions making the right moves? Use the list below 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. Zumiez Inc. (ZUMZ): Services Industry. Market cap $797.63M. Net institutional shares purchased over the current quarter at 3.2M, representing 14.76% of the 21.68M share float. 3-year CAGR of free operating cash flow at 75.70%. Last year EBITDA at $53.76M vs. total debt at $0. Current price at $25.73 vs. target price at $30.88 (implies a potential upside of 20.02%).

2. Synaptics, Incorporated (SYNA): Technology Industry. Market cap $887.42M. Net institutional shares purchased over the current quarter at 4.3M, representing 12.66% of the 33.96M share float. 3-year CAGR of free operating cash flow at 72.34%. Last year EBITDA at $70.36M vs. total debt at $2.3M. Current price at $25.91 vs. target price at $32.68 (implies a potential upside of 26.14%).

3. Ebix, Inc. (EBIX): Technology Industry. Market cap $762.17M. Net institutional shares purchased over the current quarter at 3.7M, representing 10.87% of the 34.03M share float. 3-year CAGR of free operating cash flow at 56.61%. Last year EBITDA at $58.54M vs. total debt at $35.57M. Current price at $19.31 vs. target price at $29.50 (implies a potential upside of 52.77%).

4. LogMeIn, Inc. (LOGM): Technology Industry. Market cap $901.88M. Net institutional shares purchased over the current quarter at 2.0M, representing 9.81% of the 20.38M share float. 3-year CAGR of free operating cash flow at 165.17%. Last year EBITDA at $21.91M vs. total debt at $0. Current price at $37.5 vs. target price at $50.43 (implies a potential upside of 34.48%).

5. KongZhong Corporation (ADR) (KONG): Services Industry. Market cap $191.87M. Net institutional shares purchased over the current quarter at 530.4K, representing 9.4% of the 5.64M share float. 3-year CAGR of free operating cash flow at 159.85%. Last year EBITDA at $10.16M vs. total debt at $3.55M. Current price at $5.08 vs. target price at $10.00 (implies a potential upside of 96.85%).

6. Travelzoo Inc. (TZOO): Services Industry. Market cap $1108.25M. Net institutional shares purchased over the current quarter at 517.8K, representing 9.35% of the 5.54M share float. 3-year CAGR of free operating cash flow at 34.87%. Last year EBITDA at $25.86M vs. total debt at $0. Current price at $67.33 vs. target price at $109.40 (implies a potential upside of 62.48%).

7. OpenTable Inc. (OPEN): Technology Industry. Market cap $1943.46M. Net institutional shares purchased over the current quarter at 2.0M, representing 9.11% of the 21.95M share float. 3-year CAGR of free operating cash flow at 61.46%. Last year EBITDA at $25.48M vs. total debt at $0. Current price at $82.56 vs. target price at $104.70 (implies a potential upside of 26.82%).

8. LHC Group, Inc. (LHCG): Healthcare Industry. Market cap $440.8M. Net institutional shares purchased over the current quarter at 1.4M, representing 8.91% of the 15.72M share float. 3-year CAGR of free operating cash flow at 90.95%. Last year EBITDA at $103.15M vs. total debt at $0. Current price at $23.61 vs. target price at $28.70 (implies a potential upside of 21.56%).

9. AsiaInfo-Linkage, Inc. (ASIA): Technology Industry. Market cap $1245.54M. Net institutional shares purchased over the current quarter at 4.0M, representing 8.86% of the 45.15M share float. 3-year CAGR of free operating cash flow at 21.01%. Last year EBITDA at $84.95M vs. total debt at $0. Current price at $16.96 vs. target price at $26.92 (implies a potential upside of 58.72%).

10. ION Geophysical Corporation (IO): Energy Industry. Market cap $1533.94M. Net institutional shares purchased over the current quarter at 8.9M, representing 7.78% of the 114.35M share float. 3-year CAGR of free operating cash flow at 55.92%. Last year EBITDA at $180.43M vs. total debt at $108.66M. Current price at $9.89 vs. target price at $14.00 (implies a potential upside of 41.56%).

(List compiled by Becca Lipman)

Tony Chou runs the Investorz' Blog, a blog about investment and financial advice.

Losing money on investments can be hazardous, not just for your current financial health, but also for your future financial health.

When people start losing money, they begin the 'losing begets more losing' cycle. After an investor has lost money on his or her investment, he or she wants to immediately make that money back. So the investor quickly looks for an investment opportunity that seems promising, and then invests in that opportunity. We all know that there is no such thing as an easy lunch, and picking the right, profitable investment isn't easy doing. So with so much haste behind the second investment (which the investor hoped would pay back the losses from the first investment), the second investment wasn't properly analyzed, thus has a high chance of losing money.

So after 2 consecutive losses, the investor wants to make back the money he or she lost from BOTH of those investments, and ends up losing money on the third investment.

So when you've lost money, take a break. Think about what you did wrong. Losing money and then hastily making another investment will only cause you more heartbreak.

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Monday 1 August 2011

Making Easy Money

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