“It’s my way or the highway.”

That’s the attitude of some investment professionals toward stock-selection methods that differ from their own. If astronomers had a narrow view like that, they might spot Jupiter but miss the beautiful rings of Saturn.

The price-to-cash flow ratio isn’t my favorite measure, but I see merit in it, and I devote one column each year to stocks that look good viewed through this lens.

What is cash flow? It’s an attempt to measure the actual cash flowing through a business. It differs from reported earnings by ignoring non-cash entries such as depreciation and amortization.

“Ignoring,” in this case, means adding those items back to reported profits. Cash-flow analysts may also add back taxes and interest payments. The theory is these things aren’t an intrinsic part of the business’s operations.

A business that’s acquiring another might pay off the debt and alter the tax situation. So cash flow is especially interesting to potential acquirers. That’s why the price-to-cash flow ratio can help to identify potential takeover targets.

Here are five companies that look good on this measure to me now.

Capital One

In my column a year ago about cash flow, the first stock I recommended was Capital One Financial Corp. (COF). It rose 52% in the ensuing year. I recommend it again this year as it still sells for five times cash flow, an attractive ratio, though not as cheap as a year ago.

This year, Capital One acquired Discover, making it by some measures the largest U.S. credit card issuer. I like to see banks earn 1% or better on their assets. Capital One has done that in 12 of the past 15 years.

Comcast

Comcast Corp. (CMCSA) provides television, phone or internet service (often a bundle of the three) to about 31 million homes in the U.S. It also has business and international customers — about 51 million customers in all.

The dividend yield is about 3.75%, and there is room for Comcast to raise it. Earnings have been consistent, with a profit 22 years in a row. The stock sells for about four times cash flow and eight times free cash flow (which is cash flow adjusted for capital expenditures).

Allstate

Ranked by premiums written, Allstate Corp. (ALL) is the third-largest auto and home insurance company in the U.S. It used to be No. 2 behind State Farm Group but has been passed in recent years by Progressive Insurance Group.

Allstate shares go for about six times cash flow. The stock has more than doubled in the past five years. Twenty-one Wall Street analysts follow it, of whom 17 recommend it. I don’t usually like to ride with the majority, but, in this case, I agree with the analysts.

Murphy Oil

Traditional oil-and-gas companies have fallen out of favor. Some investors philosophically prefer solar and wind. Others have abandoned ship on “old” energy as the price of oil has fallen from more than $100 a barrel in early 2022 to about $63 a barrel now.

I think oil and gas will be a big part of the U.S. energy picture for another two decades. One stock I like in this industry is Murphy Oil Corp. (MUR), based in Houston. Its stock sells for about two times cash flow and eight times free cash flow.

Gray Media

Most speculatively, I recommend Gray Media Inc. (GTN), selling for less than two times cash flow. The firm, based in Atlanta, owns about 180 television stations serving 113 markets. The company says it reaches about 37% of U.S. households. Many of its stations are in small cities.

While TV has been steadily losing market share in advertising to the internet, it remains an important advertising medium. The company’s finances look shaky, but the stock (at about $6, down from a high of near $24) is so cheap as to make it a good speculation in my view.

Performance

The stocks I recommended a year ago based on their cash flow returned 29.97%. That handily beat the Standard & Poor’s 500 Total Return Index at 15.83%.

A gain of 153% in Tutor Perini Corp. (TPC) was mainly responsible for the good result. Capital One also helped, while RPC Inc. (RES), Cleveland-­Cliffs Inc. (CLF) and International Seaways Inc. (INSW) detracted.

Bear in mind my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.

I’ve previously written 21 columns about price-to-cash flow ratio. The average return on my recommendations has been 14.6%, versus 10.6% for the index. Fifteen of the 21 columns have shown a profit, while 11 have beaten the benchmark.

Disclosure: I own Allstate and Progressive for a few clients.

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