You can just never predict how or when you'll run into a stock idea. For example, the other day, as my 20-month-old daughter was putting Heinz
Investigating who makes the things you depend on can lead to great investments. For us, Heinz is likely to make the cut, especially with the way we go through those mini-vats of ketchup they sell at Costco
Oh, isn't that sooooo cute?
You can admit it. You love to dress your kid up. Every mom does. Heck, plenty of dads do, too. With hard times befalling classic kids clothier Oshkosh B'Gosh
Tom Gardner made Gap a Motley Fool Stock Advisor pick in April because of the success of its turnaround strategy under CEO Paul Pressler. Indeed, the clothier is generating buckets of cash, and according to Yahoo! Finance, it trades for roughly nine times its free cash flow when compared with its enterprise value. That's darn cheap when you consider that in the first quarter Gap's free cash flow improved by more than $200 million, or more than 200%, from the same period a year ago.
The wizard of kids' books
Yeah, you know this one, too. I mean, how could you not? Scholastic
There's plenty to like about Scholastic. For one, the next installment of the series featuring the young wizard has a title: Harry Potter and the Half-Blood Prince. There's no release date for the book yet, but it should draw better than a championship Quidditch match when it reaches stores.
Yet the tales from Hogwarts are destined to juice results for only so long. Fortunately, there's magic in Scholastic's educational publishing business, where margins reach roughly 20%, or more than double the margins for children's books. Scholastic appears relatively cheap in trading at roughly seven times its free cash flow, but earnings haven't measured up recently. That could change if the company chooses to invest further in reaching schoolchildren.
The best, and worst, part of having kids is the toys. Loud toys, fragile toys, giant toys, and those tiny choking hazards that make you scour the carpet as if you were digging for buried treasure. I love some of them and hate most of them. Some of my favorites are from RC2's
RC2 acquired Learning Curve last year, greatly expanding its line of decidedly low-tech but popular offerings. For example, the company has deals to license replica toys of John Deere
Sales at RC2 are up more than 45% over the trailing 12 months, and earnings are up more than 55% during the same period. Free cash flow now exceeds $50 million, nearly equal to its total debt. Trading at only 11 times free cash flow, RC2 appears a lot like a shiny new toy accidentally placed in the bargain bin.
These boots were made for walking
Before she can drive, your little sweetheart needs to learn to walk, and that's where Stride Rite
Fortunately, a turnaround is under way, and the balance sheet is still very strong. Consider: After subtracting Stride Rite's $2.11 in net cash per stub, ongoing operations are selling for less than $8.50 a share, or roughly 12 times forward earnings. Sure, that's still lower than the company's estimated long-term growth rate, but free cash flow comes in at more than $20 million, easily enough to cover Stride Rite's market-beating dividend of 1.92%. I don't mind getting paid to wait around while management works to resole its earnings treads.
Dude, where's my stroller?
Your kids are going to need wheels of their own from Day One. Meet Cosco, a subsidiary of Dorel Industries
Dorel recently reduced its earnings outlook because of higher raw material costs, but don't let that fool you: The company still appears in decent financial shape. For one, its PEG ratio -- a measure of how cheaply the stock is priced compared with its expected earnings growth rate -- is a mere 0.73. This means that Dorel could be trading at a 27% discount to its potential. Even better, sales are expected to rise at least 33% this year, and free cash flow for the most recent quarter appears up by more than 70%, although that number is surely aided by recent acquisitions.
Still, Dorel is far from perfect. The stock brings up the rear on our list for two reasons: Continued pressure in raw materials could hurt results, and its heavy debt load, totaling more than $500 million, leaves little room to maneuver. That's not good, but it hasn't hurt the firm's return on equity, which remains in the high teens.
Mom, I need a hug
Although Gap comes close, none of these companies is what we here at the Fool call a "story stock" -- a company whose valuation is driven more by its story than by the underlying fundamentals. In fact, a few of these firms are downright unloved by Wall Street. Dorel sets a good example here, for institutions own only 32% of its shares.
More importantly, none of these stocks is valued anywhere close to the market's average earnings multiple of 22. Scholastic gets the closest at a tad under 19. That leaves ample headroom for the shares to advance. No, you shouldn't expect these stocks to grow as fast as your kids will, but they might deliver enough to pay for a truckload or two of diapers. And that's not chump change.
Fool contributor Tim Beyers is constantly amazed by his kids. They're just so darned cute, and smart, too. After all, who could have imagined his daughter's bizarre tendency to shampoo her hair with ketchup would become the lead for a column? Tim owns no interest in any of the companies mentioned, and you can view his Fool profile here . The Motley Fool has a disclosure policy .