7 Cheap Stocks With Proven Track Records

The famous investing disclaimer states: "Past performance is not necessarily indicative of future results."

Fair enough.

But all else equal, I'll take my chances with the companies that have historically made profits versus those that have historically made excuses.

Paying a massive premium for this past performance is where the game can get dangerous. So you can call me greedy, but I want these proven winners at reasonable-to-dirt cheap prices.

Think I'm being too picky? Hold your judgments. I've found seven examples of exactly these kinds of stocks. Let me share them with you.  

How I found them
Remember that I promised stocks that not only have proven track records but are also cheap. By cheap, I mean a stock that is selling for a low multiple on earnings when compared to its growth prospects.

Of course, cheapness doesn't matter if you can't trust the earnings or the growth estimates.

This is where a proven track record comes back in. For track record purposes, I looked for companies that have been growing efficiently and profitably for a decade or more.

To find all of these factors, I screened for the following:

  • 10-year average return on capital > 10%.
  • 10-year compounded EPS growth rate > 10%.
  • P/E ratio below 20 (20 is my upper limit for cheap on a grower).
  • Future expected growth rate > 5%.

Here are seven intriguing companies that met all four criteria:

Company

10-Year
Return on Capital

10-Year
EPS Growth Rate

P/E Ratio

Projected Long-Term
EPS Growth Rate

Sysco (NYSE: SYY  )

21.4%

12.5%

15.9

10.5%

Johnson & Johnson (NYSE: JNJ  )

18.2%

12.2%

14.9

7.2%

BP (NYSE: BP  )

13.5%

13.0%

11.4

13.3%

Wal-Mart (NYSE: WMT  )

12.9%

11.6%

14.7

11.2%

Olin (NYSE: OLN  )

12.1%

16.6%

12.5

17.0%

Transocean (NYSE: RIG  )

12.0%

29.2%

9.2

18.4%

Raytheon (NYSE: RTN  )

11.7%

12.6%

12.5

10.7%

Source: Capital IQ, a division of Standard & Poor's.

These companies have achieved a lot in the past 10 years, especially in the face of two collapsing bubbles: the dot-com bubble at the beginning of the decade; the housing bubble at the end.

Their profitable growth records allowed them to make the cut while formidable companies like IBM and Merck fell one metric short. That said, you'll shortchange yourself if you go purely off the numbers and do no further research.

You need to ask these three follow-up questions:

  1. Are the current earnings a true representation of the company's current state? Watch out for one-time items, industry shifts, management changes, etc.
  2. What future growth can I reasonably assume? Past growth figures and analyst estimates have a way of overstating future prospects.
  3. Is the company likely to use capital in the future as efficiently as in the past? Watch out for empire-building, high-cost/low-upside bets, and new, unrelated business lines.

Digging in to find the answers to these questions will help you fill in the backstory behind the numbers. Let me get you started.

Two stocks whose backstories check out
The analysts at our Motley Fool Inside Value investing service go a step further after they've found their answers. They use discounted cash flow models to estimate the intrinsic value of possible recommendations. Only those stocks that are selling at significant discounts to these estimates make the cut.

Of the companies I highlighted above, they like food distributor Sysco and retailer Wal-Mart. In fact, Wal-Mart is currently on their "best buys now" list. I invite you to see the entire list and all our Inside Value research by taking a free 30-day trial. Click here to start.

Anand Chokkavelu doesn't own shares in any company mentioned. He prefers when people use the words "proven track record" vs. "cheap" when introducing him. Sysco and Wal-Mart are Motley Fool Inside Value recommendations. Johnson & Johnson and Sysco are Income Investor recommendations. Motley Fool Options has recommended a buy calls position on Johnson & Johnson. The Fool owns shares of Sysco and has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (77)

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 April 23, 2010, at 5:36 PM, leespitler wrote:

    These companies do, in fact, have a long and storied history of success but the current disaster in the guly could have a devastating if not material result on two of these companies. BP (Well Owner) and RIG (Contracted by BP) have so far lost 11 souls, created a 100 sq mile oil slick that is headed for New Orleans, have no plausible way of capping a "Blow Out" preventer 3 miles deep, have a rig that sunk yesterday and have no immediate way of stopping 8,000 BBL of oil flowing into the Gulf at the moment. The environmental damage could be one of the biggest in history. I believe it is irresponsible to recommend these two stocks at this time.

  • Report this Comment On April 23, 2010, at 5:52 PM, TMFBomb wrote:

    @leespitler,

    Further research needs to be done any of these stocks before buying...as I said in the article:

    That said, you'll shortchange yourself if you go purely off the numbers and do no further research.

    You need to ask these three follow-up questions:

    1.Are the current earnings a true representation of the company's current state? Watch out for one-time items, industry shifts, management changes, etc.

    2.What future growth can I reasonably assume? Past growth figures and analyst estimates have a way of overstating future prospects.

    3.Is the company likely to use capital in the future as efficiently as in the past? Watch out for empire-building, high-cost/low-upside bets, and new, unrelated business lines.

    -Anand (TMFBomb)

  • Report this Comment On April 23, 2010, at 10:15 PM, bluebird4 wrote:

    I've owned BP since it was Atlantic Richfield.Everything I read about future oil needs was that natural gas would play a major role and BP at that time was working hardest on supplyingit. It also has consistently paid great dividends and raised them. It's the highest dividend payer in my portfolio. Exxon weathered its huge environmental degradation-it took time- and I feel certain BP will do the same.

  • Report this Comment On April 23, 2010, at 11:01 PM, crazygood wrote:

    great article, Anand. Thank you.

    My husband and I already own SYY, JNJ, and WMT, so I will take a look at the other 4 you mention.

    Great companies with proven track records

    were available at a discount during this last year's "economic tumult"so we have used this time to buy some of these ...and now we have over 23 stocks that pay a 3% dividend or better, and also, we kept an eye on their valuations, and got them at decent prices, so they have been going up in price per share since we got them.

    So I send a big "thank you" to you and all the TMF guys for sharing your thinking.

    We would never have had the courage, the independence of mind, and the vision necessary to keep buying stocks throughout this bad past year, for example (when most people lacked confidence) if we had not been trained and schooled by the Motley Fool. So maybe you guys don't realize it, but you do make a big difference, when you offer us your daily thoughts. Thank you so much.

  • Report this Comment On April 23, 2010, at 11:12 PM, porchguy wrote:

    LeeSpliter is partly right. I seen on the news where they can cap the well under water and 11,000 gallons of oil has now escaped onto the water surface and is heading for shore.

    They have a couple tankers there already pumping out the oil spillage and they said if it does reach shore it won't be even close to the Valdeze spill.

    But, after saying that, loosing 11 people, with 2 lawsuits already in the works, I'm sure it will have an effect on the stock, but little.

    The stock was up $.33 today

    BP is very large and will be able to handle all lawsuits which will have a total of less than Exon did and they're still churning out the cash.

    BP also has a huge windmill farm and forgive me for forgetting where they're building it, but they said when it is done it will be making a profit from the word go.

    So, the only bad thing out of this rig blow up was the loss of the 11 lives and just loosing one life is devastating. But that is what companies like BP that drill in hazardous places carry a ton of insurance, just for things like this.

  • Report this Comment On April 23, 2010, at 11:23 PM, majakblue wrote:

    I have a real problem with Walmart because of their unfriendly labor practices. They have a history of requiring off-clock work hours from employees. They also employed Mexican teens as baggers and did not pay them, claiming they were "interns."

    Many people know of these practices as well as Walmart's history of driving out local businesses and will not buy from them at any price. I am one of them. Retail companies run on good will as well as price. I believe that their business model is poor for long-term profitability. I think and hope that there is a growing trend towards buying from more socially responsible companies.

    I also cannot bring myself to invest in a company that would choose to exploit poverty-stricken Mexican teens. I don't want to make money on the backs of children, but hey, that's just me.

  • Report this Comment On April 24, 2010, at 9:47 AM, abbie116 wrote:

    RIG (Transocean) is a great company with the largest fleet of offshore MODU's (mobile offshore drilling units ).

    Horizon is a sad loss as are the personnel. leespitler, you need to get your facts straight, to start with the BOP stack is located on the ocean floor at 4400 ft and can be closed by a tethered ROV, which I'm sure they are in the process of doing now. Our energy needs will not decrease and more exploration needs to be done. Unfortunately, the shallow shelf area ( under 500 ft ) has largely been explored and depleted in the the Gulf of Mexico so the trend is to deeper water which is more technically challenging. There are few vendors who can supply that kind of technology and equipment. Transocean, Diamond Offshore, SeaDrill, and a few others, all of which still have a long term bright future with the day rates these rigs command.

  • Report this Comment On April 24, 2010, at 2:30 PM, leespitler wrote:

    Rig happens to be one of the great drillers of our time and a great company. The Horizon had the state of the art safety facilities on board even though it was built in 2001! abbie116 (or who ever hides behind that handle), should understand that the ocean floor that Horizon was drilling in is a little deeper than stated (actual is over '5000 with the capacity to drill 5 miles deep! Currently no Remote vehicle has reached the bottom and the current estimates are that 1,135,600 Liters of crude are spilling into the sea DAILY. There is a drilling rig standing by to attempt to drill a recovery well to P&A the well once the weather clears. The disaster recovery attempts are currently halted based on weather. I hope that abbie116 picks up a mop and joins the recovery effort when millions of barrels of crude hit the coast line.

    Companies have to be socially responsible for lives and the environment in their pursuit of profits.

  • Report this Comment On April 24, 2010, at 3:06 PM, leespitler wrote:

    For those of you still in question as to the environmental and social impact of this disaster, I suggest you read the "Fools" just released "Disaster at Transocean Rig".

  • Report this Comment On April 26, 2010, at 1:24 PM, DenMar100 wrote:

    majakblue: I read your comments re Walmart. Can you show me the data that supports your claims about Walmart "requiring" workers to work off the clock or "mexican teens working as interns"? I would like to know. Thanks

  • Report this Comment On May 21, 2010, at 4:50 PM, DavidNeubert wrote:

    TMFBomb.

    You seem to be the only one who understands that lists coming out of a screener can make for some disastrous investments. Further work is always needed.

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