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 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. Using CAPS' stock screener, I looked for companies that have a price-to-earnings ratio below 15, a long term debt-to-equity ratio below 50%, and a return on equity above 10%.

While financial metrics are helpful, they don't always provide the whole story, so I've also included the CAPS rating for the stock to see whether the community thinks it makes sense or is nonsensical.

Source: Motley Fool CAPS.

These are just three of the results that the CAPS screener spit out, but you can run the same screen yourself to see the rest of the companies that made the cut. While the three companies above aren't meant to be formal recommendations, they are a good starting point to start some further research. And on that note, let's take a closer look at these companies.

STEC
As the processing power of computers has continued to increase, the traditional hard disk drives sold by folks like Western Digital (NYSE:WDC) and Seagate (NYSE:STX) are becoming the bottleneck in computing performance. Solid-state memory -- like the flash memory that STEC sells -- is seen by many as the next step forward for computer storage.

As the three-star rating suggests, CAPS members are rather lukewarm on STEC's stock, and I find myself regarding the stock with similar skepticism. Starting in mid-September, the stock has taken a massive drop, falling from over $40 to just over $12. While this is no doubt burning up existing investors, it has made the stock significantly more attractive from a valuation standpoint.

However, in the computer memory business the company faces continually falling prices and tough competition from other solid-state memory companies like SanDisk (NASDAQ:SNDK) as well as the traditional hard disk drive vendors. The company also has major customer concentration -- SMART Modular Technologies and EMC (NYSE:EMC) made up nearly half of STEC's total sales in 2008, and it was a warning about the company's business with EMC that sent the stock swooning in early November.

Though I think solid-state memory has a bright future, when it comes to STEC, I think what makes most sense is a wait-and-see approach.

Procter & Gamble
Going from a stock that may not make sense to one that nearly always makes sense, let's turn to Procter & Gamble. With a deep stable of cherished brands that range from Mr. Clean to Old Spice, it's tough for even a nasty recession to drag P&G down too far.

But if the quality of P&G's business isn't a major question for investors, the price of its stock should be. Since the market bottomed out in March, P&G's stock has gained roughly 35% -- noticeable underperformance when compared to the S&P 500's massive run. Today, trading at just under 15 times trailing earnings and yielding 2.8%, P&G's stock isn't blue-light-special cheap, but it seems to be a pretty fair price for a company of this quality.

In short, I would say that the CAPS community's five-star rating is right on the money when it comes to P&G.

National Oilwell Varco
While National Oilwell Varco's oil and gas drilling systems may not be as familiar to the average Joe as P&G's Crest toothpaste, CAPS members think the stock is of a similar high quality.

Just last week, CAPS member Niksurfs sounded off on why NOV is such a great pick:

I have been a fan of and owner of NOV for a long time. Through some of the acquisitions and because of the stellar management, this company has only continued to get stronger and proven itself to be more valuable. They have a patent list that makes them a technology leader in the CL/NG patch, their market pentration and segment domination is without question.

As E&P continues or should I say resumes in 2010 and 2011 buying more or staking a position at these price levels will have demonstrated that you indeed understood that opportunity knocked and you answered_the door.

Earlier this year I gave NOV a thumbs up in my CAPS portfolio, and I think the stock makes just as much sense today.

Getting down to business
Now the CAPS community wants you. That's right, do you think these stocks make sense? Or is the community off base in its faith in these companies? Head over to CAPS and join the 145,000 members that are already sharing their thoughts on thousands of stocks.

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