3 Unbelievable Bargains to Buy Right Now

Which companies are tomorrow's big winners? In our ongoing series, I'm chatting with Fool analysts and advisors to find out the stocks on their watchlists and the catalysts that would induce them to buy. By the end of today's article, you'll get three companies that the man in charge of training our analysts thinks you should be watching and three that he recently bought for his personal portfolio.

Large caps on sale
Buck Hartzell has been investing for decades and can't recall a time when large caps have been quite as cheap. A numbers-focused guy (his 100-point rating system for interview candidates is the stuff of Foolish lore), he decided to dig in on key multiples of six companies on his watchlist that share some commonalities:

  • Strong and growing businesses.
  • Very low multiples.
  • Unparalleled balance sheets.
  • Trend of buying back more of their shares.
  • A dividend that now or soon will outpace inflation.

After a thorough exploration, he found that three of them were worth watching a bit longer, and three he decided to buy.

Three to keep watching
Shares of Hewlett-Packard (NYSE: HPQ  ) took a hit when Mark Hurd left the CEO spot, but the business hasn't changed since his departure. The company's got an enterprise value/free-cash-flow ratio (Buck's proxy for price-to-earnings ratio) of 14.2, and it sports a compound annual revenue growth rate of almost 9 % for the past five years while its earnings per share have soared at a 35% annual clip. Today, it sits with gross margins of 24%. At the moment, its dividend yield is a modest 0.7%, which leaves something to be desired.

And Buck has concerns about upcoming regulations that will require printer makers to let us know how many pages we can actually print with each toner cartridge (a shocking concept), so he's keeping this one on his watchlist for now.

Joining HP is Intel (Nasdaq: INTC  ) , the chip maker with the huge moat and the healthy yield. The company's EV/FCF ratio is a historically cheap 10.0 and it pays a 3% dividend yield. Digging in, however, Buck felt hesitation about the capital-intensive nature of the business and Intel's lack of growth -- revenue has grown only 2% annually over the past five years. Granted, his numbers are quite conservative (they include the biggest market downturn in decades), but so is Buck. And so Intel remains a company to watch.

Earlier this month, Automatic Data Processing (Nasdaq: ADP  ) extended its streak to 36 years of raising its quarterly dividend, and the yield is now 3.1%. The company's EV/FCF ratio is fairly high at 13.8, but ADP has shown strong five-year growth of 7.2% annually to earnings per share. Buck ruled this one out for portfolio reasons (he already owns companies in this area) and because the company is already paying out 44% of its free cash flow, meaning the dividend doesn't have as much room to grow as the companies below.

If you want to keep an eye on these stocks, click over to MyWatchlist.com, the Fool's free customized hub to follow the performance and Foolish coverage of the companies you're watching.

Three that Buck bought
Once he started investigating his watchlist, Buck was hit by three great companies that were simply too cheap to let go. He purchased all three of the following stocks, and is convinced that the last one represents a buying opportunity that shouldn't be missed by any investor.

Johnson & Johnson (NYSE: JNJ  ) has been here before. It's seen its share price dip after a recent Tylenol product recall, but the business's fundamentals remain incredibly strong and it has exhibited amazing resilience over the years. Its EV/FCF ratio is stunningly low (10.7), and the company's five-year CAGR is 3%. Even better, its bottom line grew 8% annually over the same period, meaning it's making better use of its money. Today, J&J enjoys gross margins of 70%. The company reduced its share count at the average cost of $79 per share (Buck determines this figure by taking stock repurchases and adding back in the amount received from stock option exercises to get an adjusted cost for share count reduction), so there's optimism in the building. Buck thinks that optimism is well-placed, and coupled with J&J's 3.4% dividend yield, it's too appealing not to buy.

The reasons behind the drop in Cisco's (Nasdaq: CSCO  ) stock are a bit fuzzier. In its most recent quarter, the company reported 19% revenue growth and was rewarded with a hit to its stock on weakness in its government business. Now down 20% since Nov. 10 in a relatively flat market, Cisco has an EV/FCF of less than 10 despite growth across the board and gross margins of 64%. The kicker that got Buck to buy here was the company's decision to start returning cash to shareholders -- it will pay its first dividend by next July, the end of its current fiscal year.

Buck's biggest winner
In this environment where once again capital is precious, Buck loves strong, stable companies that lead their industries. If you believe the hype and the headlines, Microsoft (Nasdaq: MSFT  ) no longer fits that bill as it's being eaten alive by its trendier rivals, its dominance being eroded more every day. The numbers paint a dramatically different picture.

The behemoth has stable gross margins (at a stunning 80%) and its top and bottom lines have grown at a strong rate of 10% and 8%, respectively. The company's buying back its shares, using its massive cash hoard to reward investors. And Microsoft has just begun. With a bucketful of cash on hand (over $5 per share, versus debt of just over $1 per share), Buck expects CEO Steve Ballmer to increase the company's current 2.5% dividend yield, meaning huge returns for investors at today's prices. Microsoft could increase its dividend to almost 7% and still be paying out an acceptable 75% of its earnings. That's why Buck bought (and I'm doing the same as soon as our trading guidelines allow).

Buck's not the only one bullish on Microsoft. In the Fool's recent report on 13 high-yield companies, analyst Jim Royal calls Microsoft the "dividend play of a lifetime." To get instant access to this report and another dozen outstanding dividend payers, click here – it's free.

Roger Friedman doesn't own shares of any companies mentioned, but they're all now on his watchlist. Intel and Microsoft are Motley Fool Inside Value picks. Automatic Data Processing and Johnson & Johnson are Motley Fool Income Investorpicks. The Fool has a bull call spread position on Cisco Systems. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended buying calls on Intel and diagonal call positions on Johnson & Johnson and Microsoft. The Fool owns shares of Johnson & Johnson and Microsoft. We Fools may not 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 (18) | Recommend This Article (72)

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 November 26, 2010, at 1:40 PM, langco1 wrote:

    hp is a disaster and jnj is in a down trend with to many problems.look for hp to drop to the mid 30's and jnj the mid 50's

  • Report this Comment On November 26, 2010, at 2:33 PM, Tedward6 wrote:

    Nice Article. Could you elaborate on calculating the expense of eliminating shares? Cost of shares during the repurchase period + the discount employees get when exercising options?

  • Report this Comment On November 26, 2010, at 2:41 PM, TMFSunshine wrote:

    Thanks, glad you liked it. Buck explains his calculations a bit here: http://www.fool.com/investing/general/2008/10/20/fool-blog-i...

    Best.

  • Report this Comment On November 26, 2010, at 8:05 PM, pogicraft wrote:

    wow langco... very well elaborated argument there... especially as 7 of your 8 CAPS picks are losing....

  • Report this Comment On November 26, 2010, at 8:36 PM, ChrisFs wrote:

    Intel is not a growth company. Intel is so big that it is hard for it to grow any bigger. It's a good company, but you can't expect expansion.

  • Report this Comment On November 27, 2010, at 12:21 AM, Notfooled1 wrote:

    Remember that THE MOTLEY FOOL's aim is to sell you subscriptions to as many of its services as possible. Many of these services tell you to buy stocks that others tell you to sell.

    They remind me of race track touts with no stats to back up the success of their selections. Don't be fooled by these characters. You can't believe anything they say.

  • Report this Comment On November 27, 2010, at 11:05 AM, David369 wrote:

    Dang, those fools must have screwed up and gave me the good info. I keep making money...

  • Report this Comment On November 27, 2010, at 7:37 PM, TMFSunshine wrote:

    Hi Notfooled1 - If you're looking for the stats on our premium services' performance, go to www.fool.com -- big scorecard there.

  • Report this Comment On November 28, 2010, at 1:55 AM, dag154 wrote:

    The current trend is irrelevant to long term corporate value. It only reflects current market sentiment.

    Warren Buffet has invest into JNJ do you think he spent much time on analyzing the trend?

    The negative comments above are so superficial that they offer no value to investors -except for the one about Intel being so big that they will find it hard to grow .

    Langco1 can you elaborate on your points? What are the biggest problems and why have you set the specific prices as targets?

  • Report this Comment On November 28, 2010, at 4:40 PM, jm7700229 wrote:

    Oh, well. Back during the tech bubble, I dumped MSFT and CSCO. My wife bought them back in 1999 and 2000 (on the advice of her cousin the hairdresser). They are both still underwater and I'm hanging on because of the optimism that's always expressed about them. They can only go up from here, right? The dividend prediction about CSCO is welcome news. Maybe they'll beat the few pennies that MSFT pays out.

  • Report this Comment On November 28, 2010, at 10:29 PM, baldheadeddork wrote:

    @jm - MSFT's dividend at the current price is a 2.5% yield, which is about 40% above the median for the S&P for the last decade.

    That rate is below telcoms, but MSFT has infinitely better cash flow and balance sheets.

  • Report this Comment On November 30, 2010, at 8:28 PM, wfp02 wrote:

    I subscribed to MF months ago on the promise thatI would learn all about the imminent demise of the PC and the 4 stocks that would deliver the death blows.

    To this day, I have yet to see an article, a memo, a sentence, on this earth shattering event and the participants in it.

    Instead, I have been bombarded with countless spam from these guys trying to sell some newsletter or investment scam .

    As P.T. Barnum once said, "There is an Ass for every seat" ( or, was it "there is a sucker born every minute"?).

    I'm afraid the only Fool is me....

  • Report this Comment On December 01, 2010, at 12:33 PM, lizzard617 wrote:

    Information is what you make of it. the Fool has tons of info some good some suspect, it's up to the person behind the wheel to decide which is which and what to do with it... whiners!!

  • Report this Comment On December 03, 2010, at 2:13 PM, meade78 wrote:

    Couldn't agree more! I'm glad I listened to the Fool during the last couple of years. Buy good stocks and hold. Add more when they go on sale. The big drop was a big opportunity.

  • Report this Comment On December 03, 2010, at 8:12 PM, Tuchy wrote:

    Im not speaking for everyone here, but it is my assumption that many people know that Microsoft is one of the more stable and respectable companies in the tech industry, they aren't going to disappear.

    I think the reason why people aren't allowing them to grow is because APPLE is continuously innovating their offerings which are continuing to attract consumers from their reviews and reliability, which doesn't mean that MSFT can't compete with better versions of Windows and continue to better the Windows mobile platform.

    Based on MSFT's multiples I think its a great buying opportunity. Any thoughts?

  • Report this Comment On December 03, 2010, at 8:15 PM, talljohn52 wrote:

    Hey wfp02, I had the same negative reaction to all the e-mails I was getting from Motley Fool, but lately I've begun to appreciate that they are working hard to put together numerous options for us to choose from. Not everyone will like everything they offer, but I think there's something there for just about every mindset. I am a little worried that with so many options to manage, they might be diluting their talent too much, but I'm giving my chosen option a try and I'm willing to give it some time to pay off (or not). One big plus for me is that I was in "paralysis by analysis," not investing in anything - now I'm up and running.

  • Report this Comment On December 03, 2010, at 9:05 PM, stevec5792 wrote:

    I get <i> maybe </i> 10 emails a week from Fool HQ, most of which are the services in which I subscribe. A few obvious marketing emails that get deleted. I wouldn't consider this excessive. My previous employer sent that many "spam" emails <i> daily </i> on company announcements that I mostly just deleted without reading!

    I was where talljohn52 was, too. The services helped me gain focus and a bit more discipline, especially weeding out the big losers I seemed to always find (ACAS avg. cost $18+, down from $33). :)

  • Report this Comment On December 03, 2010, at 10:28 PM, winters253 wrote:

    anyone ever thought of the fool"s being a pump and dump TEAM ? . even though the fools might recommend a stock , I still do my investigation reseach before I decide if Im going to buy .

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