The Next Stock I'm Going to Buy

Last month, I admitted that I have a problem. I have a tendency to be a little flighty when it comes to researching new stocks. That is, just as I start to dig my teeth into a new stock, I often get distracted and start chasing another shiny stock that catches my eye. So I pledged to share my research on five promising stocks and determine which stock would get boosted to the top of my personal buy list.

It's now time for me to tap one of those five stocks to take a seat at the top of my buy list.

PepsiCo (NYSE: PEP  )
This great company could be a good addition to any portfolio. Of course, it has the whole battle-for-Olympus thing going on with Coca-Cola (NYSE: KO  ) for dominance in the fizzy beverage world, but it also has a giant snack-food arm that has provided significant growth. However, the company's quality hasn't escaped many investors, and the stock's current valuation suggests pretty middle-of-the-road returns ahead. For investors playing defense, that could be just fine, but it's not enough to make PepsiCo my next buy.

Home Depot (NYSE: HD  )
It's easy to be a Home Depot hater. Maybe a little too easy. The economy is sluggish, the housing market is still pretty much in shambles, and chief competitor Lowe's (NYSE: LOW  ) has made up significant ground on it in recent years. However, the company's CEO Frank Blake has been at the helm for a little more than four years now, and I think he's moving the company in a good direction. And with few investors particularly bullish on a home-improvement retailer during a prolonged housing slump, the stock also has a pretty attractive valuation. That said, retailing is a tough business, and I'm not sure I'm sold on the durability of Home Depot's competitive advantage.

Exelon (NYSE: EXC  )
There's a lot to like about Exelon, and high on the list is the stock's 5% dividend yield. The power company also has a very significant amount of nuclear generation assets. Though nuclear took a hit on the PR front this year after the disaster in Japan, most reasonable people still consider it a very viable solution for lower-emission energy generation. But as I noted in my write-up, I'm not crazy about the offer that the company made for Constellation Energy, so that knocked the stock down on my list.

Aflac (NYSE: AFL  )
It was very tough for me to not put Aflac in the top spot. I think there's the potential for very significant returns from the stock going forward. I like the dividend, I like the management, I like the business, and even without Gilbert Gottfried (or maybe especially without Gottfried?), I like the duck. Above all, I like the future potential. There are some big question marks for the health care systems in both the U.S. and Japan, which could mean more business for a supplemental insurance provider like Aflac. So why didn't it get the top spot? Because I liked another stock just a bit more.

ArcelorMittal (NYSE: MT  )
How did ArcelorMittal make it all the way to the top of my list? In four simple words: It's ... so ... darn ... cheap. As I noted last month, its price-to-earnings ratio based on average 10-year earnings -- a measure that value investor Ben Graham was a fan of -- was a mere 7.3. A commenter on one of my articles also pointed out that the stock trades at just a hair above half of the company's reported book value. But it's not just a "this is really cheap" thesis. This is also a really great company and a global leader in the steel business. Better still, it was built, is run, and is 41% owned by Lakshmi Mittal, a fellow who I think is a very savvy steel man (not to be confused with Iron Man). Finally, I should also point out that my personal portfolio is light on materials companies, so ArcelorMittal also got a boost because it would increase my portfolio's diversification.

Wait for it...
Thanks to The Motley Fool's (wise) disclosure policy, I have to sit on my hands before actually buying shares of ArcelorMittal, but my sights have been set.

But what if you're not sold on any of the five stocks I've looked at? Fortunately, there are plenty of other fish in the sea when it comes to the stock market. My fellow Fools poked and prodded five of those other fish in the special report "5 Stocks The Motley Fool Owns -- And You Should Too." To see what they found out, click here and claim a free copy of that report.

The Motley Fool owns shares of Coca-Cola, PepsiCo, and Aflac. Motley Fool newsletter services have recommended buying shares of Exelon, Coca-Cola, The Home Depot, Aflac, PepsiCo, and Lowe's Companies. They have also recommended creating a diagonal call position in PepsiCo, writing a covered strangle position in Exelon, and writing covered calls in Lowe's Companies. 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. The Motley Fool has a disclosure policy.

Fool contributor Matt Koppenheffer does not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (16) | Recommend This Article (59)

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 September 09, 2011, at 1:42 PM, bobyuran wrote:

    Great article, Matt, but it's Gilbert Gottfried.

  • Report this Comment On September 09, 2011, at 2:47 PM, TMFKopp wrote:

    @bobyuran

    Dang it! I had looked it up and apparently forgot to change it.

    Thanks and thanks!

    Matt

  • Report this Comment On September 09, 2011, at 4:15 PM, DoubleDad9 wrote:

    Would you still buy with todays furnace closure announcement ?

  • Report this Comment On September 09, 2011, at 4:57 PM, depletemycapital wrote:

    I'm glad someone @ the Fool looked @ MT finally! I'd used some Valueline #s to purchase this stock. Today's bloodbath of -8.2% was due to MT IDLING, not closing or shutting, a second mill in EXPENSIVE FRANCE!!!!!

    As needed MT is using low cost furnaces in many of its other international facilities to offset cost. Over the past week I've ended up with 700 shares @ 19.20/ share cost. I knew the market would tear MT again today, so waited till market close to purchase @ $17.8/ share. This is scary stuff!! If the Greeks don't stand up to their commitment to austerity MT will surely descend to below $15/-.

    That price tag would put it @ 2008 low! Imagine that, right in the midst of a great recession.

    But here are the compelling #s I looked at. Again I used Valueline data.

    The book value per share is listed @ $42 for the last 3 years and going forward incresing to mid 50s, by 2016..

    Its cash flow is estimated to be $8-9 billion annually for last year, 2011 & increasing going forward, (average). LT interest is $1.4-1.5 billion. MT is more than capable of servicing it's massive debt load of $24.8 billion. P.S. interest rates are close to nothing, so financing charges shouldn't be massive for the next 3 yrs. or so!!!

    Has fully developed & is in the process of developing IRON ORE mines to double its Ore production from 50 mil tons to 100 million tons by 2015! Guess what, that should take care of the increase in Iron ore prices that attack companies such as U.S Steel's bottom line!! You have in house supply of the ore & coal products you need in manufacturing.

    On MT website, it reports (2Q, 2011), property, plant & equipment @ $54 billion. Those are not rusty mining equipment waiting to be auctioned off for pennies. Also, this # does not accurately reflect the value of its Iron ore mines that are being developed as of now! But nonetheless, that $54 bill equates to, $33 a share. You could sell the property, pay off the $26 bill. debt, then have another $24 billion left, equating to $16/ share!!!

    Though they idled a second plant in Europe today, during the 2Q, 2011 conference back in July, MT said to look for an increase in demand starting 2nd half of this year. They are by no means bearish on steel demand in Asia or Europe!

    Now, with soverign debt problems in Eurodisney, somehow this could be cut down, lets say to beginning of next year. Which means though y-o-y shipments maybe higher, qtr-qtr may be lower. Oh! the amazing part is that the "sophisticated Mr. Market" will take a decrease like that as an indication of an absolute recession for the forseeable future. Which means expect a sharp drop in stock price below $15 recession level.

    Mr. Mittal, who understands steel, also owns 41% of the company, which is now better integrated than prior to the recession in 2008.

    As a subscriber of MFSA, I've seen many of their picks fall down by 15-20%, sometimes even 30% as in case of DLB from earlier this year. But, I saw them stick with it. Just like Buffet. So, when you have a company selling at 42% of bookvalue, with so much cash flow & being the largest steel manufacturer in the world, How can I resist!

    Of course, if we truly are in a double dip recession then all of this is a moot point. MT will be trading in the single digits, although I don't see that unless the calendar is set to expire by Dec of next year.

    Cheers

  • Report this Comment On September 09, 2011, at 5:02 PM, deerjames wrote:

    Matt, Why, besides the furnace, it MT that cheap?How can the world economy contract to that degree?

  • Report this Comment On September 09, 2011, at 11:00 PM, TMFKopp wrote:

    @DoubleDad9

    "Would you still buy with todays furnace closure announcement ?"

    Yes. As pointed out above, this is just an idling. It may not be great news for the near term due since it reflects signs of flagging demand. But I'm not a buyer for gains over the short term. When I buy it's because I want a quality company to earn money for me over a long period of time.

    "Matt, Why, besides the furnace, it MT that cheap?How can the world economy contract to that degree?"

    The furnace thing is really just today and the impact on the stock was greatly exacerbated by European concerns and the U.S. stock slump. It's the former point though -- the European mess -- that's a bigger issue. ArcelorMittal has heavy exposure to Europe (and the U.S.) and sluggish growth means sluggish demand.

    To your question: Can the world contract to that degree?

    To justify Arcelor's price today? I don't think so... that's why I'm going to be a buyer.

    Matt

  • Report this Comment On September 09, 2011, at 11:59 PM, artmuseum wrote:

    That's just foolish me.

    I don't buy purveyors of unhealthy sugared water

    like Pepsi

  • Report this Comment On September 10, 2011, at 9:39 AM, GW1000 wrote:

    Why do you like it over Nucor?

  • Report this Comment On September 10, 2011, at 3:57 PM, Darwood11 wrote:

    Since I purchased AFL about 3+ years ago, my investment is "only" down 38.14%. At this point, it might be a bargain, or it might not.

    PEP is "only" down 15.46%.

    This is after accounting for dividends!

  • Report this Comment On September 10, 2011, at 4:15 PM, Darwood11 wrote:

    PS: my #2 investment in 4 years?

    GLD, which beat most of my other investments for that period. The big exception is NFLX.

    My point? Good fundamentals seem to be beaten by herd mentality time after time! I have quite a few good stocks, most have taken it in the chin, from JNJ to NOV to PG to CVN to BRK.B.

    Of course, given a long enough time frame, this will change. And I'll be dead!

    True, I could have purchased MO, which would be up about 28% plus dividends, but I considered it too immoral to buy, considering the damage to the economy by smokers.

  • Report this Comment On September 10, 2011, at 4:52 PM, Frankydontfailme wrote:

    Pep and Exc are beasts. The rest are value traps in my opinion :(

    I do not see a big recovery in steel demand anytime soon (and there's so much of it). If was going to make a commodity play it would an undervalued miner of gold, silver, or at least copper.

  • Report this Comment On September 10, 2011, at 5:58 PM, TMFBreakerRob wrote:

    @depletemycapital: That emergency shipment of additional exclamation points is on its way! ;)

  • Report this Comment On September 12, 2011, at 12:28 AM, PeyDaFool wrote:

    AFL a "value trap"? Doubt it. My prediction is Aflac will double within the next two years. It's totally oversold.

  • Report this Comment On September 12, 2011, at 9:29 AM, catoismymotor wrote:

    "I have a tendency to be a little flighty when it comes to researching new stocks. That is, just as I start to dig my teeth into a new stock, I often get distracted and start chasing another shiny stock that catches my eye."

    I'm guilty of this, too. Sometimes I mistype a ticker and pull up a really interesting company by accident. I then spend the next couple of hours researching them when I should have been focused on the original focus of my research.

  • Report this Comment On September 12, 2011, at 10:06 AM, crca99 wrote:

    thx, I plan to copy your MT buy -- commentary helpful and I have no materials outside of ETFs. Trust we have a deal that you, and all, will help us follow and develop exit strategy. I see TMF has no positions.

    May I add I wish TMF would discuss sectors more often?

  • Report this Comment On September 16, 2011, at 10:14 PM, Ahmad7 wrote:

    I am buying Atmel (Atml - Nasdaq), the highest buy consensus by research

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