Don't Buy This Stock ... Yet

Mispriced companies are rare diamonds in the stock market's rough. If you want to find them, you'll have to search through a whole pile of rocky rejects first.

That's why every member of our Motley Fool Global Gains research team has to present one new stock idea to the rest of us each month. While the ideas we like best end up becoming official Global Gains recommendations, we've passed on a number of promising companies, waiting for either a better valuation or greater certainty regarding an aspect of their business.

Below, I've listed two of the companies we're still mulling over, along with the reasons why they intrigue us. If they sound good to you, consider adding them to your own watch list as well.

Garmin (Nasdaq: GRMN  )
Potential investment thesis: With a well-known consumer brand, nearly $1.2 billion in cash and no debt, and defensible niches in the marine and fitness spaces, Garmin seems to have what it takes to survive the current competitive threats coming at it in the GPS and handheld space from the likes of Apple (Nasdaq: AAPL  ) , Google (Nasdaq: GOOG  ) , and more. Should it succeed in doing so, contrarian investors should be rewarded for buying at an enterprise value that's just four times EBITDA and offers a better than 20% FCF yield.

Potential points of failure: Despite being the most attractively priced company in this space, it's also the one with the least accepted products. Its foray into the smartphone market seems too little, too late, and the company risks incinerating its nearly $1.2 billion in cash on projects destined to fail -- destroying shareholder capital along the way. Given the current convergence happening across handheld technologies and growth in apps, Garmin's navigation device, even in seemingly defensive niches, could be lost.

What we're waiting for: This could be one destined for the "too hard" pile. Although the valuation looks cheap, predicting the next wave of technology development is difficult. Apple and Google clearly have the advantages in this space, with Garmin and Nokia (NYSE: NOK  ) lagging far behind. Should the valuation persist even after Garmin shows traction in the smartphone market, that may indicate the stock is a buy.

Credicorp (NYSE: BAP  )
Potential investment thesis: As Peru's largest full-service bank, Credicorp stands to benefit from continued strength of Peru's main commodity exports such as copper and gold as well as from the country's ascension as a trading hub between China and Brazil. The bank also has a good track record for managing risk (despite its brush with Bernie Madoff), a necessary trait to be successful in Peru.

Potential points of failure: Given that Credicorp is almost a pure-play on Peru, investors should be wary of country and currency risk here. For example, the country's economic success is tied closely to the mining industry and the prices of commodities such as copper and gold. Should those drop, economic growth in Peru could retrench. Further, as the bank grows, it needs to collect more and more deposits -- an increasingly difficult proposition as long as Peru's wealth gap persists.

What we're waiting for: Although we like Credicorp's current position in the Peruvian market, the company's success should attract greater competition from the likes of Banco Santander (NYSE: STD  ) and others. The current valuation implies continued rapid growth as well as stable-to-improving asset quality. This seems optimistic given that further stability should bring competition or volatility in the market should hurt the bank's results. Either way, the valuation looks rich. Thankfully, volatility in emerging markets stocks is never far off.

Tim Hanson is co-advisor of Motley Fool Global Gains. He does not own shares of any company mentioned. Google and Nokia are Motley Fool Inside Value selections. Google is a Motley Fool Rule Breakers pick. Apple is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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  • Report this Comment On August 18, 2010, at 11:09 PM, rtichy wrote:

    I think Garmin is toast in the long run; the entry cost to provide navigation from many platforms seems to be very low. There's no reason to think that Garmin has anything amazing to bring to mobile phones and mobile phones are sucking in every platform smaller than the 50" TV over the next several years. VCRs, PVRs, DVDs, PCs, handheld games, video cameras, digital still cameras, etc.

    Full-size gaming platforms are possible, too. Just think about Bluetooth controllers, a Bluetooth phone device and an HDMI output. (Think HD 3-D goggles/glasses!)

    Unless Garmin has IP for navigation that matters, or a loyal customers base paying subscriptions, this is a dying company. Maybe it's a slow profitable death if they don't waste cash developing phones.

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