"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. Using CAPS' stock screener, 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
|
Debt-to-Equity Ratio |
Dividend Yield |
3-Year Annualized Earnings Growth |
Price-to-Earnings Ratio |
|---|---|---|---|---|---|
|
Raytheon |
**** |
24.0% |
2.3% |
15.8% |
11.3 |
|
Johnson & Johnson |
***** |
23.0% |
3.1% |
5.2% |
13.6 |
|
Linn Energy |
***** |
72.1% |
9.8% |
92.3% |
4.5 |
Sources: 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 place to start further research. And on that note, let's take a closer look at why these potential investments might make a whole lot of sense.
Raytheon
While watching President Obama's State of the Union address last night, I couldn't help but listen to everything that he said through my investing filter. At one point he started talking about the government showing some fiscal discipline (which I'd love to see) and suggested a budgetary freeze. However, he was careful to note that this freeze would not apply to certain areas -- national defense among them.
Of course that's not all that surprising. The U.S. takes national defense very seriously and the government likes to pride itself on having the most technologically advanced military on the planet. But advanced military weaponry doesn't grow on trees; it comes from folks like Lockheed Martin
But if the seemingly bottomless pocketbook the government appears to have for defense applies to all of the companies in the industry, why highlight Raytheon in particular? Well, the company has better margins than most of its competitors, it's more conservatively financed and it's expected to grow faster. And, despite all this, it's not trading at any sort of meaningful premium to the other stocks in the group.
Need more? In case you haven't guessed, I think Raytheon makes a lot of sense.
Johnson & Johnson
I could probably just say "J&J makes sense, let's move on." But let's pause for a moment to consider why I consider the stock such a no-brainer.
For starters, J&J is a huge and stable company that's proven its mettle over more than a century of successful operation. While every investor knows that past performance isn't a guarantee of future results -- or so the investment axiom goes -- a financial track record like J&J's inspires significant confidence.
This lumbering giant also operates in what I consider to be the highly attractive health-care market. Sure, reform is on the lips of everyone in Washington, but I'm going to go ahead and bet that J&J's life-saving products will continue to be highly sought after whether reform happens or not. And it's well worth mentioning that J&J also scores roughly 50% of its sales outside U.S. borders.
The company also has a very comfortable balance sheet. It produces tons of cash flow, rewards its shareholders through dividends and share buybacks, and (the past 12 months notwithstanding) seems able to continue to churn out workman-like revenue growth.
Sure, J&J isn't going to skyrocket overnight, but it just might help you get rich over the long term. So do I think J&J makes sense? You betcha.
Linn Energy
Do the numbers on natural gas up-and-comer Linn Energy look too good to be true? At first glance, they certainly strike me that way. To be sure, considering the company's cash flow over the past few years, the dividend it's paying may be on the overly aggressive side.
But there may be some truth in those fetching numbers. As my fellow Fool Rich Smith pointed out at the end of last year, natural gas companies like Chesapeake Energy
But Rich isn't the only one who's taken a positive view of Linn. More than 700 CAPS members have given the stock a thumbs-up. Included in that group is Bamafan68, who rated the stock an outperformer last month and wrote:
As long as [Linn Energy] can continue to afford 9.5-10.5% yields, I will be more than happy to keep buying the stock. It has apparently done a good job of hedging natural gas futures which has positively affected profit margins. We'll have to see if [Linn] can remain as prescient beyond 12 months.
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 145,000 members already sharing their thoughts on thousands of stocks.
Concerned a stock in your portfolio doesn't make sense? Check out my three signs of a terrible investment.
