Investing in Your Backyard: Austin, Texas

There are many good reasons for researching investment opportunities in a certain geographic area. Today it's Austin, the capital city of Texas. Living and working under the Lone Star flag, you could watch the bats fly out over the Colorado River every night. Then catch some local rock, blues, or jazz down by 6th Street, under the artificial moonlight. Dazed and confused? Let's have a look at the business district instead.

If you happen to live in central Texas, you already have a few advantages when it comes to evaluating the local market, such as access to local news sources and the word on the street, and a high probability of being a customer or employee of these companies. And if you're not a local resident, you might still want to know whether the weather matches the business climate -- a hot area could be chock-full of undiscovered treasures on their way to greatness.

Without further ado, here are the largest companies headquartered in Austin, by market cap:

Austin's official nickname is "The Live Music Capital of the World," but the alternative "Silicon Hills" moniker seems just as apt. Three of the top five companies headquartered here are technology operations, and three are official recommendations of various Foolish newsletters.

The big dog in town is Dell, of course. The company is notorious for squeezing respectable profits out of sliver-thin margins, and the stock is featured in both our Stock Advisor and Inside Value services. So why the meager two-star grade? The company is behind on its SEC filings because of accounting issues. Not options this time, but a number of balance sheet missteps over the past few years.

If that doesn't address the whole issue, Motley Fool CAPS investor, JFund, has another explanation:

Associated with cheap, throw-away computers rather than reliable, cost-effective computers as they once were. Perhaps a buy if the stock sinks more in the future because of strong brand recognition.

How about Stock Advisor pick Whole Foods, then? Organic and boutique foods is a booming sector, and Whole Foods is right there in the vanguard of this charge.

Swizzled, who rates the stock an "outperform," gives life to the ambivalent three-star rating:

Still can't make myself buy this in real life. The P/E over 30 is tough for me to swallow. Very attractive company though with management that actually cares, a very popular franchise, lots of room for growth and an excellent balance sheet. I just struggle so much to get comfortable making extended earnings growth assumptions.

Corrugated packaging isn't a sexy sector, but your fellow investors see plenty to like in the company. It's the most profitable company in its sector, and the only one that's growing revenues and profits rather than shrinking them. You'd have to go to South America to find better numbers from a cellulose or cardboard producer. That's why Temple Inland carries five CAPS stars today.

All right, what else?
National Instruments makes measurement and automation tools for the science and engineering industries. The Austin spirit is alive and well here -- the company prides itself on a "culture of fun" and has been included in Fortune's "Best 100 Places to Work" list in each of the last seven years. Whole Foods has a nine-year streak going, but who's counting?

Then there's Silicon Labs, another Stock Advisor pick sporting four stars. All-star player WillyMoe lays it out for us:

If they can keep the door open with Apple, Texas Instruments and others, they will be in position to reap benefits off of their proprietary intellectual property. They must be able to produce their products with a high yield, as this is one of the most important functions of profitability and keeping their current customers by not losing market share to other higher yielding companies. This stock will be very volatile. You should wait until prices are closer to their 52 week lows than 52 highs.

Austin is home to six more companies with at least a $500 million market cap, and two more five-star outfits. But they are outnumbered by the very small or very lightly followed companies that have yet to gain a rating in our CAPS system. Take Web services provider Vignette (NASDAQ:VIGN), for example. Once a stock market darling, Vignette is now scratching its way back from the dot-com crash. Its peers are getting bought by bigger players -- maybe Vignette is next? But the company lacks a rating for a lack of player opinions. What a shame. There are many more underfollowed Austin companies besides Vignette, too.

The Foolish bottom line
A business in the capital city has easy access to lawmakers, which comes in handy for lobbying purposes. Austin is also a major college town, thanks to the massive presence of the University of Texas. That's a great recruiting pool for local businesses. And it's another one of those centrally located cities, much like Kansas City or Memphis. You can fly across the nation on short notice, or ship the heavy stuff up and down I-35.

The people of Austin have a certain je ne sais quoi, though I'd probably get laughed right out of the Hula Hut for using language like that. Then somebody would buy me a beer and start talking about his idea for a semiconductor startup. I've seen "Keep Austin Weird" even here in Tampa, which speaks volumes about the passion people have for this town. I think that translates into some great businesses, like National Instruments or Whole Foods.

Do you agree? Disagree? Feel free to weigh in on the Austin market -- or on any stocks at all, really -- by joining Motley Fool CAPS and blasting away with your ratings and commentary pitches. And if the eyes of the ranger aren't upon you, maybe we'll come around where you live the next time.

Further Foolishness:

• Who's Buying Now?
• Turkey or Not a Turkey?
• The Best-Performing Large Caps of 2006
• Investing in Your Backyard: Twin Cities

Only three days left in this season's Foolanthropy campaign! Visit www.foolanthropy.com to learn about five reader-nominated charities and make a donation.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. He finds traffic in Austin bewildering but loves the restaurants downtown -- and who needs roller coasters when you have those hilly highways? You can check out Anders' holdings if you like. Foolish disclosure is always red-hot and delicious