3 Stocks That Just Make Sense

"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 some of the companies that may fall into that "fish in a barrel" category, I've turned to The Motley Fool's CAPS community. To put together a candidate list, I looked for companies with a conservative balance sheet, a dividend, annualized earnings growth of 5% or better over the past three years, a price-to-earnings ratio below 15, and a high rating from the CAPS community.

Company

CAPS rating
(out of 5)

Debt-to-Equity Ratio

Dividend Yield

3-Year Annualized Earnings Growth

Price-to-Earnings Ratio

AT&T (NYSE: T  )

****

70.7%

6.7%

19.4%

11.9

General Dynamics (NYSE: GD  )

****

31.1%

2.1%

8.9%

11.7

L-3 Communications (NYSE: LLL  )

*****

62.6%

1.8%

19.7%

11.9

Source: CAPS and Capital IQ, a Standard & Poor's company.

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 why these potential investments might make a whole lot of sense.

AT&T
It's impossible to talk about AT&T without bringing up Apple (Nasdaq: AAPL  ) . The exclusive agreement that AT&T has with Apple means that folks like me, who just have to have the iPhone, have no choice but to switch to AT&T. And switch they have.

The winds of change may be blowing, though. Rumors have been swirling for a while that an iPhone that would work on Verizon's (NYSE: VZ  ) network is in the works. A feel-good presentation by AT&T in early January showcasing a variety of non-Apple smartphones, along with AT&T's membership in the Wholesale Applications Community, may suggest that Ma Bell is preparing to lose iPhone exclusivity.

I hardly think it would be the end of the world if AT&T were no longer the only wireless provider slinging iPhones. As the company's recent quarter showed, AT&T's management team still has a few tricks up its sleeve. And though Verizon's stinging ads claim that its network is far superior to AT&T's, reality might not support the attacks.

Though I wouldn't count on huge growth from a giant telecom like AT&T, its low valuation, fat dividend yield, and solid business seem like a pretty nice combination to me.

General Dynamics
As I've noted in the past, when Uncle Sam is your biggest customer and defense expenditures aren't even a subject of discussion when it comes to tightening budgetary screws, you're in pretty good shape. And that holds true whether you're Raytheon (NYSE: RTN  ) , Lockheed Martin (NYSE: LMT  ) , or General Dynamics.

Now, if only General D's entire business was defense, then we'd have nothing to worry about. As my fellow Fool Rich Smith pointed out last fall, the company's aerospace division -- which is behind the Gulfstream business jets -- has taken it on the chin thanks to the recession.

Fourth-quarter results from the aerospace group weren't any more encouraging: Revenue fell 23% and operating earnings slid 37%. Luckily, that wasn't the case elsewhere. Year-over-year revenue, operating earnings, and operating margins all rose for General Dynamic's three other divisions.

I don't expect that the company's aerospace division will continue to be a drag, but I also don't see that as the biggest threat to the stock. With massive exposure to government defense spending, the company will continue to live or die on the defense budget. So unless Uncle Sam's love of a superior military force changes drastically, I think the General should be a dependable, if not flashy, pick.

L-3 Communications
Sticking with the defense sector, we'll wrap up with L-3 Communications, which offers a wide variety of defense products and services, from signal processing equipment to aircraft maintenance services. Like General Dynamics, L-3 has a very concentrated customer base -- more than 80% of its sales go to the U.S. government.

The CAPS community seems to think that L-3 is an even better bet than General Dynamics -- 733 outperform ratings and just 25 underperforms have given the stock a perfect five-star rating.

CAPS All-Star perrnat007 has been bullish on L-3 since mid-2007, and had this to say:

Strong demand in virtually every segment they service (base support, surveillance, recon systems, etc...) should continue to add to [L-3's] bottom line. Their recent acquisitions have been immediately accretive to and should continue to add to earnings. With a record backlog of funded orders, and continued defense spending, [L-3] should easily have 40-50% upside from current levels.

It should be noted that the stock is currently trading below where it was when perrnat007 picked it, although it has handily outperformed the rest of the market. Could those big gains still be ahead?

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 150,000 members already sharing their thoughts on thousands of stocks.

We've been talking about stocks worth buying, but what about stocks that you should sell? Here's how you figure out whether it's time to sell.

General Dynamics is a Motley Fool Inside Value recommendation. Apple is a Stock Advisor selection. Try any of our Foolish newsletters today, free for 30 days

Fool contributor Matt Koppenheffer owns shares of AT&T, but does not own shares of any of the other companies mentioned. You can check out the stocks that he is keeping an eye on by visiting his CAPS page or you can connect with him on Twitter as @KoppTheFool. The Fool's disclosure policy is chillaxin' because it's too busy to chill and relax separately.


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  • Report this Comment On February 26, 2010, at 6:57 PM, TMFKopp wrote:

    @AlexisMachine

    I felt like I was reading some psychedelic mash-up of James Joyce and Dr. Seuss there...

    I'm not totally sure what the point is though except that you didn't like what I had to say and you enjoy fart and poop references. If you want to clarify I'd be happy to respond...

    Thanks for stopping by though.

    Matt

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