3 Stocks That Just Make Sense

"I like to go for cinches. I like to shoot fish in a barrel. But I like to do it after the water has run out."
-- Warren Buffett

History seems to show that good investing doesn't necessarily mean picking out complex situations and basing your investment thesis on Nobel-level math. In fact, as the recent financial crisis has shown us -- not to mention Long Term Capital Management and many other examples -- too much complexity can often end in calamity.

In an effort to track down some of the companies that may fall into that "fish in a barrel" category, I looked for companies that have shown signs of brilliance. Specifically, I focused on companies with a conservative balance sheet, a forward price-to-earnings ratio below 15, a return on capital above 10%, and a dividend. I've also included the ratings that the Motley Fool CAPS community has given each of these stocks.

Company

CAPS Rating
(out of 5)

Debt-to-Equity Ratio

Forward P/E

Return on Capital

Dividend Yield

Freeport-McMoRan (NYSE: FCX  ) **** 41% 10.3 30% 2.0%
Baxter International (NYSE: BAX  ) **** 75% 11.9 15% 2.5%
ExxonMobil (NYSE: XOM  ) **** 13% 11.0 16% 2.5%

Source: CAPS and Capital IQ, a Standard & Poor's company.

While the three companies above aren't meant to be formal recommendations, they are a good starting point to start some further research. And on that note, let's take a closer look why these potential investments might make a whole lot of sense.

Freeport-McMoRan
True story: I picked Freeport for my CAPS portfolio when the stock was trading at $37 and it seemed like Mr. Market thought the world no longer needed copper. Other savvy CAPS members got in at even more opportune times, but that pick scored me a pretty sweet 114 points as the stock's 172% gain trounced the market's 57% advance since my pick.

But that was then and this is now. Today, there are still reasons to be drawn to Freeport. As we see in the chart above, the stock's valuation multiples look pretty attractive. Maybe more important are the economic conditions -- specifically the growth in China and other emerging markets. Global demand for raw materials has not only been a tailwind for Freeport but also other mining companies such as Cliffs Natural Resources (NYSE: CLF  ) and Southern Copper (Nasdaq: SCCO  ) .

However, China has been making noises like it's ready to put the brakes on its economy's blazing-fast growth to try and head off inflation. Europe, with its growing list of bailout recipients, is hardly in tip-top shape. And the purgatory the U.S. currently occupies hardly makes us a potential source of huge demand. 

At the same time, the ideal time to buy cyclical stocks like materials producers is when things aren't looking so hot and reduced profits make valuation multiples look pricey. Today, we've already got a lot of eyes on the materials sector and profits have bounced back with a vengeance since the recessionary dip.

So does Freeport still make sense? Over the long term it probably does, as it's a quality company. But for interested investors, now may be the time to dip your toes in Freeport's stock rather than jump in head first.

Baxter International
I'm sure I'm not the only one who has a bit of a love/hate relationship with health-care companies. While I'm no big fan of spiraling health-care costs, I can't help but be impressed with the profits many of the largest health-care players manage to rake in.

Of course, it's tough to talk large-cap health care without recognizing that many of the big players on the pharmaceutical side of the universe, such as Pfizer (NYSE: PFE  ) and Eli Lilly (NYSE: LLY  ) , are hard to get a handle on because they're facing hefty top-line losses from patent expirations.

What's an investor to do? One way to go about it is to look to companies with more diversified business models that aren't driven by huge, blockbuster drugs that have the potential to hobble the company when generic manufacturers are allowed to swoop in. Baxter is part of that camp. The company operates in three divisions: bioscience, which has seen success with its treatments for hemophilia and other bleeding disorders; medication delivery, which focuses on products that deliver drugs to patients; and renal, which manufactures dialysis devices.

Baxter has delivered consistently solid numbers for its shareholders and I think the stock's low multiples give investors an attractive price without as much uncertainty as there is elsewhere in the health-care sector. I also like to see that Baxter has gotten back to raising its dividend in recent years.

All in all, it looks like Mr. Market is offering a deal on Baxter that makes a lot of sense.

ExxonMobil
At a hefty $350 billion, it's going to be hard for us to expect Exxon to deliver huge returns for us. However, at a time when a lot of energy companies are looking attractive to me, it's impossible to ignore the king of the sector. While Exxon's stock may not be as cheap as some of the other major players in big oil, I'd argue that it's worth the premium because of the quality of the company and its free cash flow generation.

Let's take a look at what CAPS member Oraclepkwy had to say about the stock when giving it a thumbs-up late last month:

Exxon is trading at roughly the same price it did in early 2006, its trailing P/E is 12.7 and it carries a current dividend yield of 2.7%. I am of the opinion that the Board will soon increase the dividend with crude prices stabilizing, the Gulf oil spill negative cloud over the oil industry is clearing. The dividend is certainly safe and this is a company not about to disappear anytime soon. It is a good long term safe investment which I see providing an excellent return between the dividend and capital value growth in the coming years.

Getting down to business
Now the CAPS community wants you. That's right, do you think these stocks make sense? Or will they disappoint investors? Head over to CAPS and join the 170,000-plus members already sharing their thoughts on thousands of stocks.

Want more stocks worth owning now? My fellow Fools have put together a free report with five stocks that The Motley Fool owns and they think you should, too.

Pfizer is a Motley Fool Inside Value selection. The Fool owns shares of ExxonMobil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of Eli Lilly, but does not own shares of any of the other companies mentioned. You can check out the stocks that he is keeping an eye on by visiting his CAPS page or you can connect with him on Twitter as @KoppTheFool. The Fool's disclosure policy is chillaxin because it's too busy to chill and relax separately.


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