3 Incredible Buys for the Moderately Patient

We love investors with a short-term focus. Their panic in the face of temporary -- or even better, insignificant -- news provides us with very compelling buying opportunities of truly outstanding companies. Today, Motley Fool Pro and Motley Fool Options analyst Bryan Hinmon, CFA, shares three companies that have scintillating potential for any investor with an attention span longer than your typical news cycle.

"You can't be a contrarian for contrarian's sake; you need to understand why something's down. For these three businesses, there's a lot of short-term noise," says Bryan, who exudes the presence of a Guy Who Knows Things. "There's a lot of chirping about them now, and it may well get worse, but anyone who's looking at the medium term or longer will win out."

An industry in critical condition
It's fairly obvious why home health-care companies have recently seen their share prices plummet. First, the Wall Street Journal wrote a damning article about one of the industry's big four, Amedisys (Nasdaq: AMED  ) , that raised questions about whether the company was taking advantage of the reimbursement system. That led the SEC and the Senate Finance Committee to start their own investigations of all the major players. Then Congress cut Medicare reimbursements by about 5%, which flows straight through to the bottom line.

But amid this seeming cesspool of an industry, Bryan is rather enthusiastic about LHC Group (Nasdaq: LHCG  ) , an up-and-up operator that is poised not only to emerge from the mess but also to get stronger as a result of it. The leadership incentive structure is based on employee satisfaction and patient happiness, as judged by third-party analysts. Over half of its agencies have Joint Commission accreditation, and the company is seeking to have all of its facilities accredited. While its competitors are constantly trashed by employees on insider job boards, LHC staff workers seem content and impressed by the company's leadership, with company co-founder Keith Myers still at the helm. So as this fragmented industry struggles through tough times, LHC has the look of a strong company that's only going to get stronger.

It ain't broke
Next up is the company that sells the pipes that make data communication possible, Cisco Systems (Nasdaq: CSCO  ) . Is the company losing a step? Why is its closest competitor, Juniper Networks (Nasdaq: JNPR  ) , turning in such awesome results while Cisco has been making a habit of disappointing on its guidance? Aren't municipalities, a primary purchaser of Cisco products, broke? Why has Cisco's foray into consumer products been such a debacle?

OK, we know why it's down. But Bryan feels that if we can endure some short-term pain, we'll be buying into a remarkably strong company that's trading at a mere 11 times free cash flow. As he puts it:

If you ignore the guidance and look at the actual numbers, Cisco's been doing fine, even though its competitors are doing better. More importantly, the last major networking infrastructure build-out happened in the late 1990s and large communications companies have been slow to update. Now they're overdue and Cisco's going to get a huge boost when that bottleneck opens up. The switching costs are high and Cisco has best-in-show products, so it should be a nice ride once we get past the short-term noise.

Hungering for good news
Everyone has heard about rising food costs. Everyone knows about the unemployment and economic instability in Europe. So it only follows that many investors have lost interest in Nestle (Other OTC: NSRGY.PK), with a 10% drop in its shares recently. Again, Bryan is happy to look past today's clouds and look at the promising future for the world's largest packaged food and beverage firm:

Brands matter, and billion-dollar brands make up 75% of Nestle's sales. The company is constantly increasing its operating margins. It's got an incredible distribution network, including into developing markets. And I love the fact that they know where things are going on the nutrition, health, and wellness front, and they're moving to be in front of that trend. It's just a fantastic company that's managed for the long term. Just like the other companies I've mentioned, if you're investing for years instead of weeks, this is a great company to own.

Bryan doesn't know things by accident. Like all Guys Who Know Things, he keeps an active eye on his watchlist. Start yours today at www.MyWatchlist.com free from the Fool, or click on LHC Group, Cisco Systems, or Nestle to automatically start watching these winners.

And if those three don't work for you, we're happy to give you six great stocks that David and Tom Gardner think you should watch. Just sign up for MyWatchlist today and you'll have immediate access to our free report, "6 Stocks to Watch From David and Tom Gardner." It's waiting for you when you begin building your own watchlist. Click here to get started now.

Roger Friedman owns Cisco but none of the other companies mentioned. Motley Fool Alpha has opened a short position on Juniper Networks, which is a Motley Fool Big Short short-sale pick. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Comments from our Foolish Readers

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  • Report this Comment On February 17, 2011, at 7:00 PM, pushkart wrote:

    I've owned Cisco stock for more than 10 years now. I bought at just under $30. My patience has not been rewarded: no dividends, no growth, no stock splits.

    For a near-monopoly market leader with very competent (and competitive) products, this is rather disappointing.

  • Report this Comment On February 17, 2011, at 11:00 PM, andresmitchell wrote:

    I too have been following this company and holding the stock for ten years. I have been listening to professionals and others defend this stock time after time and have listened to John Chambers talk about how he believes in their strategy and how it is working but it never (and I mean never) does. A watched clock is right twice a day and at some point the Cisco defenders will be correct, at least for a short time. Maybe in ten more years they will get something right but this thing is and has been an under performer for a decade. I haven't seen any material changes that will change that. it was cheap at $22, it was cheap at $19, and now it is "cheap" at $18 and change. I can't wait to see how "cheap" it is after the next earnings disappointment and what new buzzwords for failure John Chambers can come up with. I guess it will be really cheap at $14 when they report their disappointing full years earnings in August and Chambers tells us about how "they are in transition," they were "surprised," "they hit a speed bump (as opposed to an air pocket)," and their "strategy is working." Stop defending this stock until there is a change at the top. It's just awful.

  • Report this Comment On February 18, 2011, at 8:20 AM, TMF42 wrote:

    pushkart & andresmitchell:

    I understand your frustration with Cisco, but I think you're anchoring on the past.

    To say that that Cisco "hasn't grown" over the past decade is silly. Revenue has grown from $22B to $42B while CFFO has grown from $6B to $10B.

    It is fair to say that the stock hasn't budged much, but the business has grown considerably.

    But remember, if you bought shares in 2001 you paid an EV/EBITDA multiple of 42x. Buying shares today only costs an EV/EBITDA multiple of <9x. The valuation, "what you pay," is what is so compelling about Cisco relative to what you get: a very healthy company that provides important products and services critical to how we'll live our life over the next 50 years.

    If Cisco repeats its performance in the next ten years, shareholders who buy in at only 9x should be rewarded.

    Don't look backward, look forward. Now, whether or not Cisco's competitive position is slipping and it will be able to double in size again (in sales) over the next decade is another story.

    Thanks for reading.

    Bryan

    TMF42

  • Report this Comment On February 23, 2011, at 2:38 PM, jpg1930 wrote:

    Mr. Friedman...I agree with your synopsis of LHC Group and having worked with them, your comments are very accurate. I am curious about your comment of it being a "cesspool of an industry". Are you meaning financially or are you speaking of the care they provide? If it is the latter, you are highly ignorant of the great role these companies play in the lives of aging Americans. I am guessing you have not experienced the excellent care and patient centric nature of Home Health and Hospice, but your time will come. There are always a few bad apples that get highlighted by the press that can give this industry an undeserved black-eye. I would think you would rise above this since your own profession can also take some hits from these bad apples causing people to think less of journalists. Your general comments tend to make you less credible, which is not a great trait for a journalist.

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