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This article is part of our Rising Star Portfolios series.

Building a list of companies you'd like to own, but don't yet for one reason or another is a key part of investing. Maybe the price isn't right, maybe you haven't looked into it deeply enough, whatever. Using a watchlist keeps these companies in front of you, so that you can invest in them when the time is right.

Three companies that came across my radar screen recently while looking for the next company to add to my Messed-Up Expectations (MUE) portfolio -- which invests in companies that the market is not expecting much from at all -- are Best Buy (NYSE: BBY  ) , Dr Pepper Snapple Group (NYSE: DPS  ) , and Ford Motor (NYSE: F  ) .

Best Buy
When this electronics retailer reported third-quarter earnings in mid-December and said that lower demand for high-priced televisions, computers, and game software was hurting results, the stock got pummeled to the tune of 17% in just two days. And it hasn't recovered since. Does that make it a value? Or a value trap?

Well, last night's price means that the market is expecting free cash flow (FCF) annual growth of only 6.8% for five years, 3.4% for the five years after that, and then nothing after that (which I'll abbreviate as 6.8% / 3.4% / 0%) (discounting at my 15% hurdle rate). The company's grown FCF by 8.4% per year over the past five years, so the expectations might not be too far off.

Add in the fact that 3-D TV sales have been slow, which has also been hurting high-end retailer hhgregg (NYSE: HGG  ) , and possibly won't pick up until people start upgrading from the large flat screens bought over the past couple of years, and I think it's leaning more to the "trap" side of the equation.

Dr Pepper Snapple
On the surface, Dr Pepper looks like a prime candidate for the MUE port. With trailing FCF of $1.4 billion, the market is expecting the company to actually shrink FCF on this pattern: -4.3% / -2.2% / 0%, based on last night's closing price. If it could instead hold FCF steady, there's nearly 25% upside baked into the price. Except for one thing.

In the first quarter of 2010, Dr Pepper struck a 20-year deal with PepsiCo (NYSE: PEP  ) in which the latter would distribute various drinks for the company. PepsiCo paid a one-time cash payment of $900 million, which promptly showed up in Dr Pepper's deferred revenue line on its balance sheet and in cash flow from operations. And that boosted FCF by a similar amount -- it got the cash, after all.

Unfortunately for the surface story, unless Dr Pepper is going around striking similar-sized deals each year going forward, that amount has to be backed out to more realistically see what is a sustainable level of FCF generation going forward. Doing that changes the FCF growth pattern to 15.9% / 7.9% / 0%, a pattern that's not nearly as "messed-up" as I like.

Much to my surprise, this company showed up on a screen I ran recently, looking for MUE candidates. The drop in price after the disappointing earnings report at the end of January hasn't really reversed itself yet, so currently, trailing FCF of $6.7 billion (note that Ford hasn't yet filed its 10-K, so that's through Sep 30, 2010) is only expected to grow with a 4.7% / 2.3% / 0% pattern. Given its aggressive debt reduction, growing sales, and intriguing new models, I suspect that's going to turn out to be significantly lower than what Ford actually delivers over the next several years. I'm definitely going to have to dig further into this one.

  • To see more news, add Ford to My Watchlist.

Come join me over on the Messed-Up Expectations discussion board to talk over these and other companies hitting your and my radars. One participant has made a compelling case for Nam Tai Electronics (NYSE: NTE  ) and I'm going to have to look further into that one, also.

Best Buy, Ford, and hhgregg are Motley Fool Stock Advisor selections. Pepsi is an Income Investor pick. Nam Tai Electronics is a Global Gains selection. Motley Fool Options has recommended a diagonal call position on Pepsi. The Fool owns shares of Best Buy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool analyst Jim Mueller owns shares of Pepsi and has a synthetic long on Ford. He works for the Stock Advisor newsletter service. The Motley Fool's disclosure policy is never messed up.

Read/Post Comments (6) | Recommend This Article (10)

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 February 16, 2011, at 12:34 PM, 50yardline wrote:

    I considered buying F at the end of January, but went with AMAT and DF instead. Ford will hang around $16 until they report 1Q earnings at the end of April. I don't think the February or March sales numbers will do much to move the stock. Ford could retest its recent $18.75 high maybe before the year closes out, if the 2Q and 3Q earnings are good.

  • Report this Comment On February 16, 2011, at 1:27 PM, Daisymae8 wrote:

    Ok, I really don't understand motley fool. I subscribed to your news letter which I paid for and it is mailed to my home. The last letter listed hgg and ford at the top of their buy list, so I bought both. Now it looks like everything I'm reading from the motley fool on line says not to invest in these stocks. I'm really don't understand how the publication you purchase says something entirely different on line. I really don't trust the publication now at all. Can motley fool explain this gross descrepancy

  • Report this Comment On February 17, 2011, at 10:05 AM, TMFTortoise wrote:

    Hi Daisymae,

    Simple explanation. We are a motley bunch, each with our own opinions. But the official position of the newsletter is always put forth by the newsletter and not by any of our on-line articles.

    For more, please read this:



  • Report this Comment On February 17, 2011, at 2:25 PM, bowhunte59 wrote:

    Daisymae, I noticed the same thing when I first joined the FOOLs. I read all the articles I can find on a stock I am interested in. I take notes on the FOOLs threads. Then I invest a small amount in a stock I think has the best chance to make reasonable gains. FOOL on.

  • Report this Comment On February 17, 2011, at 2:36 PM, Borbality wrote:

    Daisymae, it can be annoying to see something on the site telling you a stock is a winner and other things saying it's complete garbage, but it's nice having multiple opinions and reasons.

    You just have to spend a little more time and see which reasoning you agree with, and why. There's probably no such thing as too much information. I have a rule breakers membership and would never buy a stock just based on that recommendation alone. They know a lot more than I do but that doesn't mean every stock will be a winner.

  • Report this Comment On February 23, 2011, at 1:37 PM, Rowants wrote:

    HHG sucks. Nice 25% loss since they recommended. MF needs to modify their 10% promise. Hasn't lost 10% in a single day, but that much in any two days combined. Would be nice to know if they have an opinion as to where the bottom might be. ($0 maybe?)

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Related Tickers

10/21/2016 4:03 PM
BBY $39.46 Down -0.02 -0.05%
Best Buy CAPS Rating: *
DPS $87.86 Up +0.74 +0.85%
Dr. Pepper Snapple… CAPS Rating: ***
F $12.02 Up +0.05 +0.42%
Ford CAPS Rating: ****
HGG $1.75 Down -0.02 -1.13%
hhgregg CAPS Rating: *
NTP $7.55 Down -0.01 -0.13%
Nam Tai Electronic… CAPS Rating: **
PEP $105.62 Down -0.25 -0.24%
PepsiCo CAPS Rating: ****