3 Stocks for the Short Run

"Time is the enemy of the poor business and the friend of the great business."
-- Warren Buffett

The great wisdom in those words recently inspired me to look at companies 100 years out. That long-term approach also makes Buffett willing to pay more than you'd initially guess for truly great businesses.

Ideally, you'd want to buy a great company at a great price. But at cheap enough prices, businesses that may not be so strong in 50 (or 20, or even 10) years can make us money today.

So today, I'm going to look at three companies -- two famous, one not-so-famous -- that the market is severely discounting because of very real threats. For each, I'll give you my take on its chances of being a short-term winner.

Stock No. 1: The company Amazon.com will kill
Everyone "knows" the retail economy is moving toward the Internet. While your local mall struggles to keep occupancy up, Forrester Research projects that U.S. Internet retail sales will grow from $176 billion in 2010 to $279 billion in 2015.

Like me, you might see a sometimes dismaying amount of your money flowing into Amazon.com's (Nasdaq: AMZN  ) coffers. Between this anecdotal evidence and the broader shift from bricks-and-mortar to online shopping, it's easy to deduce that specialty retailers such as Best Buy (NYSE: BBY  ) , which mainly sell other companies' brands, are in for serious trouble.

But you ought to be careful with that assumption. Death can come slower than you'd think. Best Buy's still eking out top-line growth and returning 19.2% on equity.

When you've carved out a niche in big-box electronics retail, vanquished your closest competitor (Circuit City), and your stock still sells for a tiny forward P/E ratio of 8.6, I think you have enough life left to help investors profit in the short run.

Stock No. 2: The company with the 7.5 P/E ratio
Glancing at Yahoo! Finance, you'll see that Tellabs (Nasdaq: TLAB  ) has a P/E ratio of 20.8. But once you back out the $1.1 billion net cash hoard from this $1.7 billion company, its P/E sinks to 7.5. If you look at free cash flow instead of earnings, it's a similar picture.

Is the market crazy? What's the catch?

It seems that Tellabs, which provides networking solutions to telecoms, is going through a metamorphosis. In its last quarter, it actually reported a loss because it's plowing money into its research and development -- almost 25% of sales!

Per its CEO, "We are positioning Tellabs for long-term growth with the mobile Internet over the next decade, rather than sacrificing the potential for the sake of short-term profits." That sounds great in theory. In practice, we have to worry whether this company is a money pit.

Tellabs is growing its business internationally, but it's struggling to maintain share in the higher-margin domestic market. As Zacks Equity Research puts it:

Our major concern for Tellabs is the increasing competition in its core wireless backhaul solutions segment. We believe Tellabs will not be able to maintain its current business rate with its most important customer AT&T (NYSE: T  ) . Historically, AT&T generated 20%-21% of Tellabs' total revenue and accounted for nearly 40% of the company's sales of the broadband-data networking products.

But man, those miniscule price multiples are enticing. And I like that Tellabs is giving at least some of its cash hoard to investors via a 1.6% dividend yield. If management is correct in its vision, this could indeed be a short-run winner, big time. However, servicing the large telecom players (who have a lot of negotiating leverage) is a tough business -- especially when you're reinventing yourself. I'll be keeping tabs on Tellabs on my watchlist for now.   

Stock No. 3: No one roots for Goliath
There are certainly many things to worry about in the complex behemoth that is Microsoft (Nasdaq: MSFT  ) :

  • The cloud threatens Microsoft's cash-cow Office offerings.
  • Sales for the other cash cow, Windows, dropped 4% last quarter.
  • Google (Nasdaq: GOOG  ) already dominates Microsoft's Bing in search.
  • The video game business is nice, but just a small part of the pie.
  • Microsoft's big hope against Apple and Google for smartphone success lies in partnering with fading giant Nokia (NYSE: NOK  ) .

Despite all that, Microsoft is an absolute cash machine. Backing out its $35 billion in net cash, it trades for just 7.5 times its trailing free cash flow -- a price worthy of a dying business.

But here's the punchline. Microsoft is still growing. Its sales grew 15% over the last 12 months, and averaged 10% annual growth over the last five years.

My takeaway: Microsoft's big-time growth days are over. And it faces real threats. That said, Microsoft stock is certainly priced for gains in the short run.

The big takeaway
I wouldn't bet on the business models at Best Buy, Tellabs, and Microsoft to dominate their industries a century from now, but each is priced as if its current business model isn't built even to survive the next 10 years.

I personally own and continue to hold Best Buy and Microsoft, and I think each of the three is at least worth looking into at today's prices.

If you'd like some more stock ideas, check out our free report detailing five stocks The Motley Fool owns in its own portfolio. Just click here for immediate access. The last stock in the report is a long-run winner that investors have discounted for decades.

Editor's note: 
This article has been updated to reflect Tellabs' latest quarterly earnings release. We regret the error.

Best Buy, Google, Microsoft, and AT&T are Motley Fool Inside Value selections. Google is a Motley Fool Rule Breakers selection. Apple, Amazon.com, and Best Buy are Motley Fool Stock Advisor picks. Motley Fool Options has recommended a bull call spread position on Apple and a diagonal call position on Microsoft. The Fool owns shares of Apple, Best Buy, Google, and Microsoft. Alpha Newsletter Account, LLC owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days.

Anand Chokkavelu owns shares of Best Buy and Microsoft. He's so out of shape, even a short run scares him. 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.


Read/Post Comments (29) | Recommend This Article (74)

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 May 03, 2011, at 6:21 PM, GregLoire wrote:

    I'm a little confused by the logic of this article. Why would we expect these stocks to have high short-term gains if their prices are beaten down by a pessimistic long-term outlook? Wouldn't that long-term outlook have to change for the short-term prices to rise? Why would anyone buy stocks for the short-term if they don't believe that an adjustment in long-term outlook is likely?

    It seems to me that the expectation of large short-term gains counter-balancing long-term growth pessimism is already built into the prices, thus negating their bargain status.

  • Report this Comment On May 03, 2011, at 7:54 PM, Eulogistics wrote:

    Greg, the article points out that at current stock prices each stock mentioned has good value; in the last line the author states " I personally own and continue to hold Best Buy and Microsoft, and I think each of the three is at least worth looking into at today's prices".

    I can see where the author is coming from, but I tend to agree more with your type of thinking.

  • Report this Comment On May 03, 2011, at 8:13 PM, TMFBomb wrote:

    @GregLoire,

    I may have gotten too cute with my definition of "short run"...which is still years/decades, not days/months.

    I recently wrote an article (link in the article above) talking about great stocks for the next 100 years. My main point in this one is that these three stocks probably aren't built for 100 years. However, the market is pricing each of them as if they are in critical condition. If that isn't the case, these are bargains today.

    Does that make a bit more sense to you?

    Fool on,

    Anand

  • Report this Comment On May 03, 2011, at 8:57 PM, ernieslog wrote:

    forrester research is big on telling you how much internet sales will grow but they do not mention that store sales will also grow. i have published at least two articles going back over twenty years that debunk the idea that stores will disappear. people have been predicting the demise of auto deaker by the internet, has not happened. people like to shop.

  • Report this Comment On May 03, 2011, at 9:03 PM, hbofbyu wrote:

    Good point Ernie. Just like the thinking that DVDs and online downloads (and even home theater systems) will sink the movie chains. It won't happen. Why do you think people pay $12 for a tub of popcorn and 2 drinks? People want to get out of the house and interact, be waited upon etc. Service is a big deal. Best buy can provide better immediate service than Amazon. They won't go anywhere as long as they keep good management.

  • Report this Comment On May 03, 2011, at 10:47 PM, TheDumbMoney wrote:

    Microsoft finally announced where that cash it is holding is located, and as expected all but (I think) $8 billion is overseas. That means (as you probably know) you can't simply count all of that cash in Microstoft's favor and back it out. Unless tax law changes, you have to either assume Microsoft will pay its repatriation tax (and adjust your back-out accordingly) or that Microsoft will continue to let ga-billions sit unproductively in whatever offshore bank account they sits in, which is negative for its own set of reasons.

    That said, Microsoft, which just had 31% yoy quarterly net income growth, and which is expected to grow earnings 22% in 2011 cumulative, compared to 2011, and which just raised its dividend by 23% yoy, never mind the gobs of free cash flow it is generating, is trading at around a 10x forward P/E. It's getting absurd at this point.

    Or, alternatively, I'm batsh*t insane, and this is the mother of all value traps for the 2010--2015 era (i.e., the "short term").

  • Report this Comment On May 04, 2011, at 1:47 AM, GregLoire wrote:

    @ TMFBomb,

    Thanks for the reply. That makes more sense, though I'm still not quite sure how a company is going to improve its stock value over the next decade if its longer-term model is still plagued with pessimism even from supporters. If solid earnings over the next decade were enough to substantially raise stock values, then why aren't the prices higher already?

    This article probably would've made more sense to me if it were framed as stocks that are being unfairly beaten down because of a long-term outlook that's beyond anyone's reasonable ability to accurately predict (Berkshire Hathaway was merely a cotton mill 100 years ago, after all).

    I suppose that might undermine the theme of your other article, but predicting 100 years in the future is pretty darn hard, and not something that we humans have a great track record of doing!

  • Report this Comment On May 04, 2011, at 8:03 AM, TMFBomb wrote:

    @GregLoire,

    The stock prices don't necessarily have to go up for investors to make money. If a company generates enough cash flow (or has enough on its balance sheet), it can pay out dividends to return capital. Now, that takes a realistic, disciplined management team. Many just start taking shots at unwise "opportunities."

    Agreed on the 100 years out. In that article, I concede that no one can predict 100 years out. I come to the conclusion that if I had to choose one company, it would be Coke. It was a thought experiment I used to force myself to think longer term and help me (and readers) solidify which companies truly deserve a bit of a premium for likely longevity.

    Good discussion.

    Fool on,

    Anand

  • Report this Comment On May 04, 2011, at 8:05 AM, TMFBomb wrote:

    @dumberthanafool,

    Good points. Also, it's probably unfair to back out all the cash from any company. But like you said, even taking more conservative assumptions, the stock ain't expensive.

    Fool on,

    Anand

  • Report this Comment On May 04, 2011, at 10:34 AM, jfrankh57 wrote:

    About Microsoft: People are plowing into the Cloud, but one thing a lot of people are neglecting...Security issues are VERY prevalent in the computer arena and more so in the Cloud. Too many people I know who are in network security are paying too little attention to the fact that Cloud providers are NOT paying enough attention to security. Some are...I am seeing more and more concern being voiced over this issue. I think I will stick with MSFT for the time being!

  • Report this Comment On May 04, 2011, at 2:49 PM, TMFBomb wrote:

    @jfrankh57,

    Good point!

    -Anand

  • Report this Comment On May 04, 2011, at 3:06 PM, mikecart1 wrote:

    "Time is the enemy of the poor business and the friend of the great business."

    -- Warren Buffett

    "Listening to Warren Buffet's advice is the enemy of the new investor and the friend of his ego and all his followers."

    -mikecart1

  • Report this Comment On May 06, 2011, at 10:19 AM, wtbous wrote:

    msft is an absolute joke. By picking this, you lose all credibility. 3 times in TEN YEARS the stock has gotten above 28. cash cow for employee salaries ?? yes----deal for the stock owners?? NO

  • Report this Comment On May 06, 2011, at 11:04 AM, Rarusnans wrote:

    Take note. For Anand short term means decades. Long term is 100 years on. I am sure he believes in reincarnation. )(

  • Report this Comment On May 06, 2011, at 11:59 AM, whyaduck1128 wrote:

    mikecart1,

    That was sacrilege. How darest thou to question the Infinite and Unerring Wisdom of the Great Oracle!

    It was also pretty funny.

    I respect and admire Mr. Buffett (and own some BRK.B), but I don't think of him (or anyone else) as some Investment God.

  • Report this Comment On May 06, 2011, at 12:13 PM, foolretire wrote:

    Just a comment about bricks and mortar businesses totally going away,........How many people that buy online,...especially electronics,......1st go to a Best buy or retail store to view the picture on the TV they are shopping for to make sure that it is the quality they want?

    Having been in a discount catalogue ordering business,....I experienced that many customers will buy @ retail stores instead, and pay higher prices to get instant gratification and have the see touch and feel experience to confirm the value of thier purchase decision.

    Unless Amazon and other online retailers begin to have a storefront that can showcase, but not stock thier products,...think Apple store,....I do not see all retail brick and mortars stores EVER going away completely. Shopping at a mall is still America's past time.....even for online purchasers.

    Foolretire

  • Report this Comment On May 06, 2011, at 1:22 PM, RafiEpstein wrote:

    Hi Anand,

    I am a bit confused on TLAB.

    Looking at Yahoo France shows P/E (ttm) closer to 21.

    I assume I am missing something here, but where did you take the 11.5 P/E from?

  • Report this Comment On May 06, 2011, at 1:36 PM, 6L6 wrote:

    I for one hate malls, and I hate Best Buy, it's creepy if you ask me. I trust Consumer Reports to tell me which TV has the best picture, then I go to Amazon to get the best deal, and delivered to my living room to boot!

  • Report this Comment On May 06, 2011, at 1:38 PM, woo131 wrote:

    Some of the very best returns, in the short term (1 year) are the agency REITS. You should have mentioned AGNC, or ARR, with dividends of close to 20% and share prices increasing a bit too.

  • Report this Comment On May 06, 2011, at 2:27 PM, GregLoire wrote:

    wtbous,

    Looking at past prices is not a great way to evaluate a stock pick. Recommended reading for you: http://caps.fool.com/Blogs/that-stock-is-dead-money/560242

  • Report this Comment On May 06, 2011, at 2:33 PM, cmolinel wrote:

    "We will be all dead in the long term" (Keynes)

  • Report this Comment On May 06, 2011, at 2:51 PM, doshknight wrote:

    Tellabs PE Ratio of 3.7? I looked on Yahoo and it's more like 20. Am I missing something?

  • Report this Comment On May 06, 2011, at 3:29 PM, GaneshN wrote:

    I work for Microsoft for last 10 years and got stock options that are still underwater. I also did a MBA part time at which time we Microsoft buddies in class discussed what would the price of Microsoft stock 10 years from now be (we did this in 2008-2009 time frame). The consensus was $15-$18.

    My take is that Microsoft was never an innovative company, but used to get the idea from elsewhere or learn an existing product and execute well to make a good copycat and kill the competition. That knack has gone off last few years and it hasn't been able to kill competition (Apple and Google) either. Think about Bing and Windows Phone's continuing struggle whereas it has been tremendously successful with Windows, IE, XBox, etc.

    I really hope that the stock hits 30 before October so that I can make some little payback for my 10 year wait. Of course, it hit mid 30s twice in the last 10 years and stupid me was too greedy to have passed those rare chances to capitalize. :-(

  • Report this Comment On May 07, 2011, at 12:16 PM, ht1977 wrote:

    I, like Greg, am confused with the login, as it applies to Tellabs. I had Tellabs stock for a number of years, hoping it would come back to it's highs of $7 -$9.00, but the core tech stocks just aren't moving. When Tellabs dropped another 20% in Feb, I finally cut my losses. I found another sector that is showing growth...I'm tired of waiting and hoping on Tellabs.

  • Report this Comment On May 08, 2011, at 4:32 AM, Agnesthientran wrote:

    To: The Mothleyfool Foolsub.com

    Dear Sir,

    Yesterday, not for today, and today its not for tomoroow, everyone have to understand that and me too. I do not know why my feeling so what kind up business very strange my field. I might not know how to playing stocks. Many more type of business to make money, many more ways have to make money. How can I could do..if I go to the wood wirh emty hand without nife or weapon..there are in the wood Tiger,Lion serpent snake attack how I can do. My feeling lonely, not actracty me "anymore to do so". Its very important to me my state very really real. So I feel sorry.

    Very honest am I.

    Agnes thien Tran

    May.08/2011

  • Report this Comment On May 08, 2011, at 9:35 AM, TMFBomb wrote:

    @RafiEpstein and doshknight,

    When I wrote the article a few days ago, Yahoo! Finance was reporting a P/E ratio of 11.5. Since then, Q1 earnings have been incorporated, taking the P/E ratio up to 20.8.

    The 3.7 P/E ratio that I calculated (after backing out cash), is now 7.5.

    To summarize, in Q1, Tellabs reported a loss (vs. a gain the year before), largely (but not completely) due to putting extra money into R&D. Expect more in the future, per management. The key question for investors is if you believe in management's vision...the downside is if management whittles down the cash hoard with poorly conceived R&D.

    You can read their entire Q1 earnings report in this PDF file:

    http://www.tellabs.com/news/2011/1q11.pdf

    Fool on,

    Anand

  • Report this Comment On May 08, 2011, at 11:31 AM, Junster wrote:

    I am somewhat confused with the assumption that if a company has a good cash deposit in banks this company is valued to be a buy. What if they just keep the cash for themselves what investors get from the cash pie?

  • Report this Comment On May 08, 2011, at 3:08 PM, bobaa wrote:

    Best Buy?

    Have you shopped there? There sales people don't know their product, that is if you can find a sales person who is interested in talking to you. I don't believe that a retail company that operates like that can be around for the long term.

    But then, that's the way I felt about Circuit City.

    Bob

  • Report this Comment On May 09, 2011, at 1:03 PM, mighty88 wrote:

    Go for CF, MCP and IMAX , I am now m0re than 100% from the three

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