5 Undervalued Stocks With Free Cash Flow to Burn

Look beyond the P/E. These five firms are inexpensive based on free cash flow.

Anyone who dabbles in individual stocks is probably familiar with price-earnings ratios. The P/E—simply a stock’s share price divided by the underlying company’s earnings per share—is the simplest, most elegant way of assessing value. It essentially tells you how much investors are willing to pay for each dollar of a company’s reported profits. All things being equal—rarely the case, unfortunately—the lower the P/E, the better the value.

Earnings, however, are not a perfect measure of profitability. Before companies post their results, they make accounting adjustments that include noncash charges against income such as depreciation and amortization. That leaves room for manipulation, says Sean Gavin, manager of Fidelity Value Discovery Fund. “Earnings are an accounting metric,” he says, “which means they’re often misleading.”

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Ryan Ermey
Former Associate Editor, Kiplinger's Personal Finance

Ryan joined Kiplinger in the fall of 2013. He wrote and fact-checked stories that appeared in Kiplinger's Personal Finance magazine and on Kiplinger.com. He previously interned for the CBS Evening News investigative team and worked as a copy editor and features columnist at the GW Hatchet. He holds a BA in English and creative writing from George Washington University.