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At the start of each month I check (and publish here) the top five stocks I watch closely throughout the remainder of the month - stocks which exhibit strong fundamentals, based on two key metrics:

  1. A low price to free-cash-flow ratio (P/FCF), and
  2. Strong institutional buying.

It is true to say most retail investors and traders have access to more information and data crunching capabilities than ever before. Equally true is the fact that the smart money always manages to remain a step ahead, maintaining the elusive edge, with pooled resources, specialist experience and ever focused pin-sharp industry and company specific analytics. My objective with this strategy, is to follow the smart money, towards identifying the most undervalued stocks, based on P/FCF...

The P/FCF ratio is a more accurate measure of stock's value than the commonly observed price-to-earnings (P/E) ratio. A company’s ability to generate cash flow is one of the most important indicators of its financial well being. The P/E ratio is unable to provide an accurate reflection of a company and its 'efforts' to generate cash flow. Hence, cash flow ratios examine the 'flow' of money into the business. Moreover, the pure P/FCF ratio quickly and effectively identifies the strongest (and weakest) companies in this context.

Below is the select, up to date list (June 2011) of stocks which meet this simple criteria. Each company is valued at a minimum $300m, has had a sharp increase in 'institutional' ownership (smart money moving into the stock) exceeding a very positive 20% over the most recent quarter, and coupled with the stock exhibiting a low price-to-free-cash-flow (P/FCF) ratio of less than 10. Put simply, free cash flow accounts for a healthy 10% plus, of each company's overall valuation.

Stock #1: Newcastle Investment Corp (NYSE:NCT)

With a P/FCF of 9.08, institutional ownership comprising 42.4% of outstanding shares, and a noteworthy quarter-on-quarter increase in institutional transactions of more than 38%, NCT also exhibits additional positives, including an ultra-low PEG ratio (0.38) and positive year-on-year earnings growth. NCT is currently priced at $5.29/share, up 75.3% over the last 12 months.

Stock #2: Boise Inc (NYSE:BZ)

With a P/FCF of just 4.16, institutional ownership comprising 88.8% of outstanding shares, and a noteworthy quarter-on-quarter increase in institutional transactions of more than 39%, BZ also exhibits additional positives, including an ultra-low PEG ratio (0.37), a low price-to-book (P/B) value of 1.0. BZ is currently priced at $7.98/share, up 40% over the last 12 months.

Stock #3: Met Life Inc (NYSE:MET)

ith a P/FCF of just 6.49, institutional ownership comprising 73.66% of outstanding shares, and a noteworthy quarter-on-quarter increase in institutional transactions of more than 27%, MET also exhibits additional positives, including a low price-to-book (P/B) value of 0.90, and the technical Relative Strength Index (RSI) indicator crossing above the oversold level (bullish). MET is currently priced at $42.68/share, up 4.5% over the last 12 months.

Stock #4: Western Refining Inc (NYSE:WNR)

With a P/FCF of 7.71, institutional ownership comprising 63.77% of outstanding shares, and a noteworthy quarter-on-quarter increase in institutional transactions of more than 37%, WNR also exhibits additional positives, including a low price-to-sales (P/S) ratio of 0.19, and 'insider' ownership of 38.38%. WNR is currently priced at $16.21/share, up 241% over the last 12 months.

Stock #5: TeleNav Inc (NASDAQ:TNAV)

With a P/FCF of just 5.24, institutional ownership comprising 32.87% of outstanding shares, and a noteworthy quarter-on-quarter increase in institutional transactions of more than 21%, TNAV also exhibits additional positives, including low debt-to-equity (almost negligible), and solid gross margins of 81% (net margins 21%). TNAV is currently priced at $16.36/share, up 94% over the last 12 months.

Institutional ownership/transactions sourced from Finviz.

Stock price, technical analysis & performance data sourced from Tradepilot.

Source: 5 Stocks With Low Price to Free-Cash-Flow and Strong Institutional Buying