The Obvious Buys in the Stock Market

Sometimes, we overthink.

For those of us who spend our lives scouring the stock market for great deals, there's often a bias toward uncovering the next big thing or championing the fallen angel. In the worst cases, we can become the anti-Peter Lynch and end up "buying what we don't know."

So today, I want to highlight five obvious, rock-solid companies that are trading for reasonable-to-low price multiples. In other words, good stocks at good prices that I think can beat the Dow (INDEX: ^DJI  ) and the S&P 500 (INDEX: ^GSPC  ) .

Let's start off in the retail space for our first two. As we move increasingly to an e-commerce-driven society, there's a tendency to pooh-pooh anything bricks-and-mortar because of Amazon.com. The result is unfairly cheap prices for many retailers. I do think specialty retailers Best Buy and RadioShack have been beaten down unfairly and have bought shares myself, but they're closer to fallen angels than rock-solid businesses. Instead, let me point out Wal-Mart (NYSE: WMT  ) and Target (NYSE: TGT  ) . When I look at any other retailer, I think to myself, "Can it compete successfully with Wal-Mart, Target, and Amazon?" Usually, the answer is "No."

They define a convenient, real-time one-stop shopping experience. Unless shipping becomes instantaneous versus next-day, Wal-Mart and Target will continue to have allure. And, if you're like me, once you're there, you're loading up your cart.

Each holds moderate debt, leading to returns on equity around 20%, and each trades for 12 times next year's earnings estimates.

Now, what value investor's list of obvious buys would be complete without mentioning Warren Buffett's Berkshire Hathaway? I won't belabor the point, because it's well-worn ground. Think of Buffett's sprawling conglomerate as a mutual fund carefully constructed by the world's greatest investor. Buffett wants the company to be his legacy, so you can imagine the care he's taking to make sure his baby is built for the long haul. Last year, shares were trading so low that Buffett got the Berkshire board to approve an unprecedented potential action. When shares trade down to 1.1 times book value, Berkshire may now buy its own stock back. Shares trade at a smidge over 1.2 now. Not as low as Buffett's magic number, but still an obvious buy.

Speaking of mutual funds, Johnson & Johnson (NYSE: JNJ  ) is known as a de facto health-care mutual fund. J&J dominates in medical devices, prescriptions, and the famous consumer goods such as Band-Aids and Tylenol. And unlike the health-care insurers, J&J will be strong regardless of just about any future regulatory scenario.

Looking long-term, I also don't believe that recent product recalls or negative legal results will significantly impair the juggernaut's prospects. J&J is trading for less than 15 times average earnings and free cash flow for the past five years and a dividend yield of 3.5%, and I continue to happily hold my shares.

Moving on to tech, it's fun to bash Microsoft. It's the big, lumbering bully to Apple's splashy it-boy. All of us cubicle dwellers complain about Windows and Office, laugh at Google's dominance over Bing in search, and perhaps defect to Chrome or Firefox over Internet Explorer. And let's not even talk about Microsoft's forays into mobile.

We can make fun all we want, but cutting away the comedy, Microsoft's Windows and Office cash cows have remained dominant and Microsoft hasn't been dying. It's been growing earnings per share at an 18.6% annual clip over the past five years. That's growth-stock-worthy. But factoring in its net cash, it's trading at less than 8 times free cash flow. Add in a 2.7% dividend yield, and Microsoft is looking mighty tasty.

I think that at today's prices, Wal-Mart, Target, Berkshire Hathaway, J&J, and Microsoft are solid businesses that are obvious buys. For some more solid companies to consider, check out our free report: "Secure Your Future With 11 Rock-Solid Dividend Stocks." It features two of these five companies. Get access to the report.

Anand Chokkavelu owns shares of Microsoft, Apple, Best Buy, Johnson & Johnson, and RadioShack. The Motley Fool owns shares of Amazon.com, Berkshire Hathaway, Johnson & Johnson, Apple, Microsoft, Google, Wal-Mart Stores, RadioShack, and Best Buy. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway, Johnson & Johnson, Apple, Wal-Mart Stores, Google, Amazon.com, and Microsoft, creating a bull call spread position in Microsoft and in Apple, creating a diagonal call position in Wal-Mart Stores and in Johnson & Johnson, and writing covered calls in Best Buy. We Fools don't 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 (12) | Recommend This Article (112)

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 22, 2012, at 3:24 PM, ramirezcar wrote:

    How can you really think the Johnson & Johnson will remain immune to the many legal issues associated with their many recalls? I guess you have not been reading the news lately.

  • Report this Comment On January 22, 2012, at 6:01 PM, dwilh51183 wrote:

    Apple (aapl) is a better investment than all of those puddle along stocks. BUY AAPL before Tuesday's close. Target $500 by end of the month

  • Report this Comment On January 23, 2012, at 1:18 PM, FoolishLonghorn wrote:

    After holding Johnson and Johnson for years, I finally gave up and sold it about a year ago. It has performed quite a bit worse than the SP500 over the past 3 years.

    I grew tired of waking up in the morning and reading the news about some new quality control issue at a JNJ facility. Of course the stock was promptly slammed.

    JNJ charges quite a premium for their over-the-counter meds. When they are constantly recalled and the generics are not, that premium is bound to vanish.

    Spare me the foolish JNJ quality company mantra that has been repeated over and over and over.

    Sold JNJ, bought Abbott, and now no longer fear opening up the business section of the paper.

  • Report this Comment On January 23, 2012, at 4:37 PM, stan8331 wrote:

    Good article - it is easy to overlook behemoths like Wal-Mart and Microsoft versus flashier competitors, but they do look attractive at these levels. I agree that Buffett will leave Berkshire in very good shape whenever he departs.

    The only company in this bunch I would flat-out reject is J&J. Size is not adequate insulation against poor management decision-making. Given recent history, I'm just not convinced current J&J management is up to the task.

  • Report this Comment On January 23, 2012, at 5:07 PM, Truth2Power wrote:

    @dwilh: unless they don't do as well as everyone (including me) thinks they ought to. There's been a lot of hype about their upcoming quarterly earnings announcement, and I just wonder if they only post modest numbers--or even excellent-but-not-as-high-as-hyped numbers--how the market will react.

    Of course, as somebody who bought in at about $120 a share, I am a happy fellow indeed.

  • Report this Comment On January 23, 2012, at 8:33 PM, haywool wrote:

    Hey there !

    <i>In other words, good stocks at good prices that I think can beat the Dow </i>

    For me ... I don't want to "beat the Dow", I want to "make money." If the Dow drops by 1.6% and my portfolio drops by only 0.8%, I have "beaten the Dow." BUT I STILL LOST MONEY. And that ain't what I want.

    Rich (haywool) owner of WMT and long, long time owner of BRK at only $2400/shr.

  • Report this Comment On January 24, 2012, at 1:56 AM, Chontichajim wrote:

    Like the other responders I don't see JNJ beating the DOW, but we could be wrong.

    I have WMT and TGT on my watchlist since they look good on paper though WMT looks better. I have never been in a WMT since they avoid our area and I am not going to drive 20-30 miles just to visit a store. With Dollar Tree, TGT, COSTCO, and Ross (long on Dollar Tree & Ross) in our area it can't be that we are too good for them, must be zoning laws. WMT needs to build more smaller stores to compete.

  • Report this Comment On January 24, 2012, at 10:12 AM, TMFElmosWorld wrote:

    Hi Anand,

    Great article! However, I'm not so sure I agree with Walmart. There's no doubt that this company built its hugely successful empire early on by entering into small towns and driving the mom and pop shops out of business with it's scale and cost efficiencies. WMT still has a tremendous franchise here in the US as it generates ROIC substantially above its WACC, of course meaning its operations domestically are still adding value. But, abroad is a completely different picture as the company does not enjoy the same strategic positioning. In other parts of the world they are battling against some large and entrenched foes, not similar mom and pops that they easily overcame here in the US. The proof is in the pudding as reflected in a divisional breakdown of ROIC, where in the non-US segment it appears as though WMT is actually destroying value. Yet they still invest instead of returning more cash to shareholders! WMt was a topic of a conference I attended recently, and this was exactly what was discussed.

  • Report this Comment On January 25, 2012, at 3:05 AM, ilovesumm wrote:

    Microsoft is dying a slow death.

    Apple undercuts its prices on Iphone but charges

    double what a Windows computer would cost??

    If Apple cut their price of their computers (say $500 entry level) and let others use their software Microsoft would be finnished.

    There is openoffice that is free and does what microsoft office does .

    Microsoft has not done anything meanigful in 10 years . One day it will be the Rimm or Palm of the computer world.

  • Report this Comment On January 27, 2012, at 1:21 PM, JimonSummerhill wrote:

    FoolishLonghorn nailed it. J&J is poorly managed, I also traded my shares in for ABT. Not just quality issues, but improper marketing practices, etc.

  • Report this Comment On January 28, 2012, at 7:01 PM, gcmagone wrote:

    The next "big thing" is not exactly news. Oil production, and a lot of it, will be necessary for years to come. The largest reserves are being found offshore in deep water. There are only a few drilling companies that are able to meet this demand. The leader with the most modern rigs is a company called SEADRILL (SDRL). Not only is it big and growing but, it pays a very good dividend of 8+%. It belongs in all growth/income portfolios.

  • Report this Comment On February 04, 2012, at 7:08 AM, thidmark wrote:

    "Microsoft is dying a slow death."

    It will be a verrrrrrrrrrrrrrrrrrrrrrrrrrrrrrry slow death based on the cash its pulling in right now.

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