"I like to go for cinches. I like to shoot fish in a barrel. But I like to do it after the water has run out."
-- Warren Buffett
History seems to show that good investing doesn't necessarily mean picking out complex situations and basing your investment thesis on Nobel-level math. In fact, as the recent financial crisis has shown us, too much complexity can often end in calamity.
In an effort to track down companies that may fall into that "fish in a barrel" category, I've turned to The Motley Fool's CAPS community. Using CAPS' stock screener, I looked for companies that have a price-to-earnings ratio below 15, a long-term debt-to-equity ratio below 50%, a return on equity above 10%, and a high rating from the CAPS community.
|
Company
|
CAPS Rating
(out of 5)
|
Price-to-Earnings Ratio
|
Return on Equity (TTM)
|
Long-Term
Debt-to-Equity Ratio
|
|
Johnson & Johnson (NYSE: JNJ)
|
*****
|
13.0
|
27.6%
|
18%
|
|
ArcelorMittal (NYSE: MT)
|
*****
|
5.0
|
15.6%
|
36%
|
|
Baker Hughes (NYSE: BHI)
|
*****
|
11.4
|
16.1%
|
25%
|
Source: CAPS. TTM = trailing 12 months.
These are just three of the results that the CAPS screener spit out; you can run the same screen yourself to see the rest of the companies that made the cut. While the three companies above aren't meant to be formal recommendations, they are a good starting point for further research. And on that note, let's take a closer look at these companies.
Johnson & Johnson
Calling any stock a "no-brainer" is asking for trouble. So I'll just say that Johnson & Johnson -- with its 3.3% dividend and trailing price-to-earnings ratio of 13 -- is undoubtedly a stock that should be on most investors' radars.
Competition abounds for J&J's group of businesses -- whether it's Procter & Gamble (NYSE: PG) on the consumer side, Merck (NYSE: MRK) on the pharmaceutical front, or Stryker (NYSE: SYK) taking on the medical-device group. But the company certainly seems to be up to the challenge.
On the pharma side, J&J has nine products with $1 billion or better in annual sales, and it's looking to the future with a robust pipeline and a big research and development budget. Meanwhile, the devices business has a market-leading position in the areas of sutures and contact lenses, while it's one of the top dogs in other major areas, like joint reconstruction and glucose monitoring. And we certainly can't forget about the company's stable of rock star products like Tylenol, Band-Aid, and Neutrogena.
Combine business quality with stock price and I come to the same conclusion that the CAPS community does: J&J is a clear winner.
ArcelorMittal
Let's not beat around the bush. ArcelorMittal's third-quarter results looked pretty gnarly. The company is back into profitability -- a refreshing change from last quarter -- but revenue and net income were still down, 54% and 76%, respectively, from the same quarter last year.
But if you're the world's largest steelmaker trying to navigate the postcrisis world, what's on your mind right now? If you said China, go ahead and grab yourself a cookie. The company estimates that 44% of 2009 global steel demand is going to come from China, and if you stack the rest of the developing world on top of that, you get to nearly 80% of the steel market.
The U.S.? Sure, we still consume a good amount of steel, but we're going to be much more sluggish coming out of this downturn than the rest of the world. Meanwhile, steel demand in China is already starting to aggressively bounce back.
Expect to see ArcelorMittal jump all over this nascent recovery. The company has a bunch of capacity that it's itching to get back online and has its eyes on a number of growth projects targeted at emerging markets.
The company's bread and butter is steel, but the fuel for its engine right now is clearly BRICs. (But seriously, that's the developing economies of Brazil, Russia, India, and China.)
Baker Hughes
Lower oil prices have worked their way through the supply chain and slapped Baker Hughes in the face, since it supplies products and services for oil well drilling. As customers such as Chevron (NYSE: CVX) feel the sting of lower prices, they reduce exploration and drilling activity, and with less drilling going on, there's an understandably reduced appetite for products like drill bits and well-completion systems.
Of course, that kind of talk could be considered history at this point, as oil has clawed its way back up to nearly $80 per barrel. While the heady days of $140-per-barrel oil may not be back anytime soon, today's prices should put some pep back in the step of oil prospecting. And in the meantime, Baker Hughes took the downturn as an opportunity to reduce costs, increase efficiencies, and shore up its balance sheet.
Maybe it shouldn't be so surprising, then, that nearly 1,100 CAPS members have rated Baker's stock an outperformer, and it carries a perfect five-star CAPS rating.
Getting down to business
Now the CAPS community wants you. Do you think these stocks make sense? Or is the community off base in its faith? Head over to CAPS and join the 140,000 members already sharing their thoughts on thousands of stocks.
Further CAPS Foolishness:
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