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, or basing your investment thesis on Nobel-level math. In fact, as we've learned from the recent financial crisis -- not to mention Long Term Capital Management 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 assemble 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're a good starting point for further research. Let's see why these potential investments might make a whole lot of sense.

Cal-Maine Foods
If you're looking for predictability, you won't like the contents of Cal-Maine's carton. Though the company hopes to make its egg-slinging business a bit more stable by selling specialty shell eggs, the industry remains largely a commodity, subject to big swings in both the selling price for eggs and the cost of feed for the hens.

Even the company's dividend lacks the reliability that investors tend to expect from quarterly payouts. In late 2007, Cal-Maine adopted a variable dividend policy, in which it pays out one-third of each quarter's profit. If the company has an unprofitable quarter, the policy forces Cal-Maine to shut off the dividend spigot until future profits make up for the loss.

For investors willing to put up with the swings, though, Cal-Maine could make a lot of sense. The company is one of the largest in a relatively fragmented industry, which gives it some definite scale advantages. It does carry a moderate amount of debt, but also a healthy amount of cash, giving it a fairly secure balance sheet. And while Cal-Maine does take lumps when prices move against it, when times are good, they can be very good.

Johnson & Johnson
What Cal-Maine lacks in predictability, J&J has in spades.

Like major pharmaceutical competitors like Pfizer (NYSE: PFE) and Merck (NYSE: MRK), J&J faces patent expirations on some of its major products in coming years. Unlike its primarily pharma-focused foes, J&J is well-diversified across drugs, medical devices, and consumer products. Investors haven't completely overlooked this; J&J's stock trades at higher multiples than both Pfizer and Merck.

For dividend-focused investors, J&J may make even more sense. The company has one of the best dividend records out there; it's not only consistently paid its investors, but also reliably boosted that payout year after year. While J&J's current 3% yield may seem pretty attractive for such a high-quality company, it looks even better when we consider that the company has more than tripled its payout over the past decade.

Transocean
There's a good reason why this deepwater driller is a fan favorite on CAPS -- it's riding a key trend in the energy industry. As onshore oil exploration turns up fewer new finds, oil and gas companies are increasingly heading offshore to track down new reserves.

As a leader in the industry, oil majors like ExxonMobil (NYSE: XOM) and Petrobras (NYSE: PBR) have turned to Transocean to take advantage of the company's drilling equipment and expertise when it comes to offshore and deepwater drilling.

It's important to note that Transocean skirts the requirements to be included in this list, since its "dividend" is scheduled to be a return of capital. But given that, and the hefty amounts of cash the company has collected over the past few years, I wonder whether a regular dividend could be in the cards.

Either way, CAPS members have found plenty of reasons to give Transocean's stock a thumbs-up. Late last year, CAPS All-Star 2Cores joined the bullish chorus on Transocean, highlighting its industry dominance:

Most of the big oil finds of the last few years have been under water. [Transocean] is the number one underwater driller by any measure. It only makes sense that Brazil, Nigeria, Norway, China, Canada and others will seek their help to get it out. Also, they have moved HQ to Switzerland which may help boost profits from a currency standpoint.

Getting down to business
Now the CAPS community wants you. Do you think these stocks make sense? Or is the community off-base here? Head over to CAPS and join the 160,000-plus members already sharing their thoughts on thousands of stocks.

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