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 -- not to mention the Long Term Capital Management hedge fund and many other examples -- 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 five years, a price-to-earnings ratio below 15, and a high rating from the CAPS community.

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.

Abbott Laboratories
From Abbott to Eli Lilly (NYSE: LLY) to Merck (NYSE: MRK), the big pharma sector has been under a storm cloud for some time now. The ongoing battle in Washington over health-care reform has left the sector -- along with the rest of the health-care industry -- in the lurch as both managers and investors try to divine whether reform will happen and, if so, what it will mean for drugmakers.

At the same time, drug portfolios and pipelines have increasingly been under the market's microscope as investors shake in their boots over upcoming patent expirations.

I'll be blunt:  I have neither inside information about which direction Washington is going to go nor the kind of background that would allow me to do an intelligent analysis of Abbott's menu of drugs. So do I just skip over the company altogether?

A couple of years ago, a fellow Fool wrote an interesting article about Warren Buffett and his views on investing in health care. In short, when it comes to drugmakers, Buffett focuses more on their long-term success, financial resources, and demonstrated expertise as opposed to shorter-term concerns about the current drug pipeline.

When it comes to Abbott, we could talk about its century-plus track record of success, its strong balance sheet (which includes nearly $10 billion in cash), or its ability to consistently produce very attractive returns on equity. In other words, Abbott looks like it could be a good bet despite the current pessimism.

Canadian National Railway
It's hard to talk railroads without bringing up Buffett and Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) purchase of Burlington Northern Santa Fe.

Much of the talk surrounding that deal centers on whether Buffett overpaid to acquire the rail operator. As my fellow Fool Morgan Housel pointed out, though, Buffett defended the deal in his annual letter to shareholders, saying that not only was it a good opportunity to deploy a lot of capital, but that he believes it will offer "reasonable" returns over the long term.

Maybe Buffett did overpay -- or at least paid a big enough price that returns won't be all that impressive. But as far as it concerns Canadian National Railway, the fact that Buffett would make such a big move in the industry seems to be a strong vote of confidence in the future of rail transportation.

Times have been tough lately for most of the rail carriers, and Canadian National is no exception. However, the company has some of the best margins in the industry and doesn't appear to be on the ropes with its debt load. And with a price-to-earnings ratio of less than 15, investors get a near-30% discount to the valuation Buffett paid for Burlington Northern.

Joy Global
Coal, copper, and China. That could be the mantra for Joy Global as it looks past the global recession and aims to dig in and deliver growth for its investors.

As a manufacturer of the heavy equipment that gets natural resources like coal and copper out of the ground, Joy Global is a chief beneficiary of China's growth and its ravenous appetite for raw materials. At the same time, as the rest of the world enters (what we hope is) a lasting recovery, the company should start to see business pick up elsewhere as well.

Though Joy Global's stock isn't quite a perfect five-star pick on CAPS, it has a strong following, with nearly 1,500 outperform ratings. CAPS All-Star toolboy2 weighed in with this bullish outlook midway through last year:

Investment returns are fabulous and profit margins and growth rates are exceptional for its industry. Though carrying moderate debt, these guys stand to gain from any global infrastructure surge that may occur with govt's spending money like crazy.

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.

All three of these stocks pay dividends. But should we care? Are dividends dumb?