Editor's note: No "secret" can help you find great investments all the time...

But by knowing what to look for, you can get a leg up on everyone else.

On that note, we're turning this weekend's Masters Series over to frequent Digest contributor and Extreme Value editor Dan Ferris...

Over the years, Dan has discovered five financial "clues" for finding great investment opportunities. These clues are critical for analyzing a business... and they make up his "simple template" for finding great stocks.

This weekend's essays are adapted from a 2013 series that first appeared in our free DailyWealth e-letter. Today, Dan shares the first two financial clues you need to keep in mind when looking for great businesses... and shows you exactly where to find them...

The Key to Finding Your Next 100% Gain in the Market

By Dan Ferris, editor, Extreme Value

Through the years, I've received many e-mails from folks who write in to ask me...

"Dan, how do you analyze the stocks you recommend? Is there a secret to finding great investments?"

The answer is no, there are no secrets... But I've found a process that works well. I've learned it over a period of years, by trial and error... maybe a little inspiration and intuition... and even a bit of luck.

After experimenting for many years, I finally arrived at my first simple template for finding great stocks. I call it the "Five Financial Clues." And this weekend, I'm going to share some of the clues I look for...

This first clue led me to stocks like Prestige Consumer Healthcare (PBH) – which we sold for a 406% gain in my Extreme Value newsletter... and Constellation Brands (STZ) – which we closed out for a 631% win, one of the top 10 largest in Stansberry Research history.

So, what's the first financial clue I look for? Simply put, I want a business that gushes free cash flow.

Free cash flow ("FCF") is all the excess cash profit left over after a business pays its expenses and taxes and after it reinvests enough cash to maintain and grow the business.

When you buy a stock in your brokerage account, you're buying a piece of a business. It's not a debt interest, and it's not a preferred stock interest.

It's equity. And equity is a "residual claim" on the earnings of a business. "Residual" just means the equity holder doesn't get paid until everybody else gets paid.

This is really important...

You see, nothing is left over for equity holders until secured creditors, salary and wage earners, taxes, trade creditors, unsecured creditors, and preferred stockholders all get paid.

Only after all these obligations are met can you, the equity holder, expect your shares to be worth anything.

In fact, excess cash flows are the one thing that gives your stock nearly all of its value.

It makes sense, right? This is what makes a business valuable... the ability to generate a lot of extra cash. Without excess cash, your shares are worthless.

Think of it a different way...

Suppose you own a business. You want that business to pay you as much cash as possible during the time you own it. And that's true whether you own 100% of a business you run yourself – or whether you own just one share of a multibillion-dollar company.

It's easy to find a company's FCF...

All you do is go to the "cash flow" section of a company's financial statements and subtract "capital expenditures" from "operating cash flow."

If you want to be nitpicky, sometimes operating cash flow is called "cash from operations" or "net cash from operations." And sometimes, capital expenditures are called "additions to property and equipment" or something similar.

Take iPhone maker Apple (AAPL), for example...

Here's how you calculate Apple's FCF. Through the end of 2020, Apple's trailing 12-month cash flow from operations was $88.9 billion. Let's subtract $8.7 billion for capital expenditures. This equals $80.2 billion.

That's a lot of FCF, more than any nonfinancial company in the world.

What's interesting is most people have no idea how important this financial clue is, so they're unable to understand what an amazingly good business Apple really is. No other business generates as much FCF as Apple.

To sum up the first clue before we move on to the next one...

• FCF is the cash left over after a business pays all its expenses and taxes and reinvests enough to maintain and grow itself.

• FCF is important because it's the amount of excess cash available for creating shareholder value, which is how you make the most money.

• FCF is cash from operations minus property and equipment spending. Both of those numbers are on the cash flow statements inside a company's quarterly and annual reports.

The thing is, not all businesses use their cash to reward shareholders... to pay their shareholders back. But the great ones do. That's the second clue...

Great companies reward their shareholders in two ways. The first strategy is pretty straightforward. But as for the second strategy... Most folks don't understand how it works.

The first way a great business rewards its shareholders is simply by paying cash dividends. Cash dividends are usually paid quarterly, and they're good for two main reasons...

First, they provide you with a regular cash return on your investment. In fact, one study shows that investors earned 394% on stocks from 1991 to 2010, and that 43% of that return came from dividends.

That's a huge chunk of the return. If you're investing in stocks, you simply can't afford to ignore dividends.

Really great dividend-paying companies raise their dividends every year for many years in a row, often for decades.

For example, Extreme Value subscribers have seen gains of more than 600% on Automatic Data Processing (ADP)... The payroll and tax-filing processor has raised its dividend every year for 46 years in a row.

In fact, with some good dividend-paying stocks, you'll make more on the dividends than you will from the share price going up.

And what's interesting is, companies that begin paying dividends after not paying them often perform just as well as companies that raise their dividends.

Years ago, a study by Ned Davis Research showed that stocks in the benchmark S&P 500 Index that either raised or initiated dividends from 1972 to 2004 outperformed all other stocks in the S&P 500.

The worst performers were companies that cut their dividends – or never paid them in the first place.

Here's the bottom line... Dividend-paying stocks are the best place to put a large chunk of your stock market money.

Now, the second way companies reward shareholders is by buying back their own stock...

Why is this good for you? Well, when a company reduces its share count, it's like cutting a pie into four slices instead of eight slices. You're getting a much bigger piece of pie. Likewise, as the company's share count falls, each remaining share is worth more.

For example, Starbucks has returned 101% in pre-tax capital gains and dividends since I recommended it in Extreme Value in August 2018. It has lowered its share count by about 15% since then.

And here's another reason why share buybacks are good...

You have to pay taxes on cash dividends – but you DON'T PAY TAXES when a company is using cash to buy back shares... even though a share repurchase makes your shares more valuable.

In other words, a share repurchase is like a tax-deferred, noncash dividend that you receive for as long as you hold your shares.

So, to sum up the second clue...

• Look for companies that reward shareholders. Shareholders are rewarded in two ways – through dividends and share buybacks.

• Look for companies that raise their dividends every year.

• Look for companies that buy back shares and reduce their share counts.

One more thing to keep in mind...

Regardless of how much cash a business generates – or how much it rewards its shareholders – there's a major number you need to check before you know you've got a "sleep well at night" investment. I'll share that in tomorrow's Masters Series...

Good investing,

Dan Ferris

Editor's note: Regular Digest readers know Dan is unlike any other analyst in our industry...

He lives and breathes the principles he shares each month in his Extreme Value advisory. And he'll only recommend companies that meet his exacting standards.

So, when he starts "pounding the table" on an idea, we listen closely...

Today, Dan has identified what he believes could be the single biggest financial opportunity that he has ever uncovered... with LESS risk than most stocks out there today. It comes with a significant margin of safety – and 1,000% long-term potential.

If you're looking for the type of opportunity that comes around maybe once or twice a decade, you owe it to yourself to hear the rest of the story. Get started right here.