Roundtable: The Best Stock Out There

Price is very, very, very, very important. Very.

Buying stock in even the best company at a terrible price leads to a poor investment. This is undeniable.

But even the best companies go on sale occasionally. So today, I asked some of our top analysts to name names, and reveal the top stocks on their wish lists, by answering this question:

If you could own stock in any company at a reasonable price, which company would you pick?

Here are their answers.

Matt Koppenheffer: Two words: Berkshire Hathaway (NYSE: BRK-B  ) . Of course, Berkshire Hathaway is currently at a reasonable price, and I already own it, so let’s move on.

I would, however, be all over Visa (NYSE: V  ) if the price were right. Though credit cards have gotten a bad name through the financial crisis, Visa -- unlike American Express and Discover -- is only involved in the best part of the business -- charging companies for using its network. It’s like a toll road on steroids.

For me to start getting excited about the stock’s price, I’d like to see it at or below $60 a share.

Tim Beyers: If only I had listened to my instincts. Two years ago, at $22.82 a share, I bet on Netflix (Nasdaq: NFLX  ) in Motley Fool CAPS, but I never added the stock to my real-money portfolio. Stupid.

"Were Netflix on pace to never become anything more than a movie-rental business, I wouldn't just be selling the stock -- I'd be shorting it," I wrote at the time. "Yet, thanks to its emerging Watch Now instant-viewing service, I see a far richer future for Netflix than others might."

The stock has more than doubled since. Sigh.

I'd love to own Netflix, but not at present levels. Valuation isn't my primary concern. Instead, I believe that a topsy-turvy market should give me a chance to buy at less than $45 a share, or 25 times trailing earnings. That's a fair price given Netflix's growth opportunity, which just got bigger thanks to a streaming deal with Nintendo for the Wii.

Morgan Housel: Hands down, it'd be Costco (Nasdaq: COST  ) . Very few companies have managed to sell at the lowest price humanly possible while remaining profitable like Costco has.

Here's a rundown of its business model:

  • Sell for a hair above wholesale cost, just barely covering the warehouse's operating expenses.
  • Make all your profit on membership fees.

 You get a good view of this by breaking out parts of its income statement:

 Segment

2008

2007

2006

Net Margins from Sales

1%

1%

1%

Membership Dues

$1.5 billion

$1.3 billion

$1.2 billion

Net Income

$1.3 billion

$1.1 billion

$1.1 billion

So all profits come from membership fees. This is important, because competition has to have an equally large membership force to compete with retail margins. You can't just start from day one and compete with Costco. The only way smaller competitors can be as profitable is to sell at higher retail prices. That moat means not only large, but also safe profits for years to come. 

Alex Dumortier: The company I'm looking at has a long pedigree in the public markets, and it's been a great success story. Moreover, its prospects still look good, even though it is being overshadowed by higher-growth foreign competitors. How much would you pay for the stock, which has a 1.9% yield and expected EPS growth over the next 3-5 years of 10.7%? At 20.8 times its average inflation-adjusted earnings over the prior 10 years (cyclically-adjusted earnings), it looks richly priced at present.

Oh, did I mention this company's name? It’s the S&P 500. If this index drops to about 883 (from the 1100s today), you'd be paying 16 times cyclically-adjusted earnings. At that price, a full weighting in U.S. stocks looks like a reasonable bet. At 12 times cyclically-adjusted earnings, which the index achieved last March, your expected long-term return becomes really mouth-watering. We could yet see those valuations this year; historically, all major bear markets have witnessed single-digit cyclically-adjusted price-earnings multiples.

Toby Shute: Setting aside valuation, and thinking about which businesses you'd want to own, is a fantastic starting point for any investor. From there, you can decide what price you'd pay for each security, and then just watch and wait for Mr. Market's next tantrum. That's admittedly easier said than done, since most of us have trouble just sitting still. (I personally use CAPS to scratch that itch.) Sometimes, though, you don't have to wait long.

In January 2009, I wrote about one of the best industrial companies I've ever seen -- Graco (NYSE: GGG  ) . I proceeded to buy shares from around $21 on down to $15-and-change as the market tanked. I completely exited my position by the summer, when Graco traded at more than $25 and I spotted opportunities elsewhere. I'm feeling more than a bit of seller's remorse. I'd love to own this company again if I could get in around $20. Danaher (NYSE: DHR  ) and Rotork plc also make my industrial dream-team list.

Those are our dream stocks. After you’ve shared yours in the comments section below, take a look at the 10 top-performing stocks in the market.

This roundtable article was compiled by Anand Chokkavelu, who owns shares of Berkshire Hathaway and happily notes that Warren Buffett works for him. American Express, Berkshire Hathaway, Costco Wholesale, and Discover Financial Services are Motley Fool Inside Value picks. Berkshire Hathaway, Costco Wholesale, Nintendo, and Netflix are Motley Fool Stock Advisor selections. The Fool owns shares of Berkshire Hathaway and Costco Wholesale. The Motley Fool has a disclosure policy.


Read/Post Comments (18) | Recommend This Article (77)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 16, 2010, at 11:36 AM, mainlymanna wrote:

    Ditto to AlexisMachine - thought you read my mind - what would be your pick? - I would go with IPHS - safe - undervalued - long-term growth - nice moat - I own it, but I will acknowledge that most of my personal owns are very speculative,(ACAS-AIB-DPTR-OCNF-SAY), so this is safe in relation to those. At some point within three years, all will be 2-5 baggers or bought out at a very nice return. I may be wrong, but I don't think so - Thanks for your time.

  • Report this Comment On January 16, 2010, at 12:00 PM, memoandstitch wrote:

    You should rename this article to the Best Wishes Out There.

  • Report this Comment On January 18, 2010, at 12:50 PM, TMFKopp wrote:

    @AlexisMachine

    "a bag of cow poop..."

    "why waste time" ?

    If you like, you can speculate on bags of cow poop that appear undervalued. Many long term investors, however, prefer to focus on high quality companies for their portfolio and it's worth while to have a watchlist of the best companies out there even if their prices aren't ideal. As the recent downturn showed, sometimes these stocks do fall to reasonable prices and you have to be ready to jump on them when they do.

    Matt

  • Report this Comment On January 18, 2010, at 1:07 PM, xserver wrote:

    DHR: I'm always wary of growth by acquisition stories...pass.

    GGG: Now this looks interesting, deserves more research. I'm looking for an industrial in my portfolio. Thanks for this one.

  • Report this Comment On January 18, 2010, at 4:58 PM, FleaBagger wrote:

    @TMFKopp

    Thanks! I always enjoy it when somebody dignifies a comment from someone who shouts and references cow poop. You made my day.

  • Report this Comment On January 18, 2010, at 5:06 PM, TMFHousel wrote:

    I'd actually argue that cow crap is worthless at any price.

  • Report this Comment On January 18, 2010, at 6:05 PM, Sabrinho wrote:

    Actually cow crap isn't totally worthless if it's being used as fertilizer :D lol

  • Report this Comment On January 19, 2010, at 12:28 AM, greenwave3 wrote:

    Agreed. You could indeed make fertilizer. But that would have to be one giant pile of steaming crap for any entrepreneur to make money. I would argue that urine would be even less valuable, but I think that cigarette companies are still buying the stuff to add "flavor" to their products.

  • Report this Comment On January 22, 2010, at 10:56 AM, mcpingist wrote:

    Wow, what a big help. Most of your contributors just gave an opinion for a stock at a price it isn't available for at this time. I don't need experts to help me with that. If we're just talking "I wish" scenarios, I can pick them myself. Sorry to be so negative but that was just a waste of my time.

  • Report this Comment On January 22, 2010, at 1:03 PM, tfloto wrote:

    In January 2009 Sanmina Corp (SANM) was trading at under a $1 per share. I bought shares at average $.57. There was a 1 to 6 split in august so my share price became $3.42. Today these shares are trading at $12.00. Also I bought Jinpan (JST) in June 2009. $31.57 per share, it is now trading at $40.00.

  • Report this Comment On January 22, 2010, at 1:09 PM, mkdriscoll wrote:

    Wow. To the high school detention kids who found this site...I hear ya, I remember my first beer...wrapped my old man's Impala around an Oak tree! See you at the Bevis and Butthead convention.

  • Report this Comment On January 22, 2010, at 1:42 PM, RobertC314 wrote:

    Not sure about being the best stock out there, but if you really want to buy cow crap cheaply EPG might just be your company.

  • Report this Comment On January 22, 2010, at 3:38 PM, jimmyshouse wrote:

    If this Roundtable was written by high school students, I must belong in grade school. I read the entire article looking for a reference to stock in RoundTable Pizza, wanting to know how much one would have to invest to reap the rewards of "ROUNDTABLE : THE BEST STOCK OUT THERE "

    My 401K , invested in the best Nationwide Retirement Services had to offer, lost $78,000.00 before I finally bailed as the DOW sunk ever further into the low 6000s. After retiring last year and using a good portion of my remaining fund to buy a house, I have only $20,000.00 left to invest, so you can see why I am hesitant to offer it up to anything other than "THE BEST STOCK OUT THERE". If it's not RoundTable (duh) , what is it ?

  • Report this Comment On January 22, 2010, at 5:04 PM, rx7thirdgen wrote:

    I agree with one of the previous posts. The list is somewhat meaningless when the price selected is so ridiculously low. Here is my point:

    What about Cisco @$10.87, IBM @ $50.18 or may be Apple @ $87.52. Very helpful eh?

  • Report this Comment On January 22, 2010, at 5:12 PM, TMFHousel wrote:

    All,

    Thanks for the comments.

    I think Anand made it very clear (er, very, very, very, very clear) that price is important.

    But we wanted to run a piece showing that, irrespective of price, some companies are inherently better than others via moats, market niches, etc. I think that's different than just making a "wish list" ... it's picking a company that you think has the strongest business model.

    -Morgan

  • Report this Comment On January 22, 2010, at 5:38 PM, rx7thirdgen wrote:

    Fair enough. However, perhaps a more relevant angle would have been to select high value companies which ARE at price levels attractive for investors. There, you can add benefit from the PROs in the discussion.

  • Report this Comment On January 23, 2010, at 9:01 PM, dividend123 wrote:

    can anyone tell me if Berkshire Hatherway BRK -B has split? I used to see this stock quoted at about $2400 or thereabouts per share.

  • Report this Comment On January 06, 2011, at 10:44 PM, Blueman1000 wrote:

    Sometimes "Fools" really are "fools". I read this article's title and thought this was going to be something, 3 seconds later I realized that someone had just returned late from their Christmas holiday and had to put an article together and grabbed this idea from their spouse who was dying from indigestion from eating too much and they threw this together. Hopefully now that it's 2011 (this article was last year) this won't happen again.

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