"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 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.
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. In assembling a candidate list, I looked for companies with a conservative balance sheet, a dividend, annualized operating profit growth of 5% or better over the past five years, a return on equity greater than 12%, and a high rating from the CAPS community.
|
Company |
CAPS rating
|
Debt-to-Equity Ratio |
Dividend Yield |
5-Year Annualized Operating Profit Growth |
Return on Equity |
|---|---|---|---|---|---|
|
Abbott Labs |
***** |
83.8% |
3.7% |
9.6% |
27.4% |
|
Tupperware |
***** |
70.1% |
2.3% |
20.2% |
35.2% |
|
Monsanto |
**** |
17.2% |
2.1% |
18.0% |
13.0% |
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 to start some further research. And on that note, let's take a closer look why these potential investments might make a whole lot of sense.
Abbott Labs
For me, the No. 1 issue when it comes to pharma companies is patent expirations. This year, Pfizer
Abbott has also suffered from this revenue-depleting eventuality. In 2008, generic versions of Abbott's epilepsy and bipolar treatment Depakote hit the market; Depakote sales dropped from $1.6 billion in 2007 to $426 million in 2009. However, while competitors are staring down the barrel at major expirations, Abbott will have a brief reprieve, since none of its significant patents expire over the next three years.
In the meantime, Abbott is fully focused on growing its business. Earlier this year, it acquired Belgium's Solvay Pharmaceuticals, which will add about $2.9 billion in revenue and give Abbott additional footholds in emerging markets. More recently, the company snapped up the drugmaking business of India's Piramal Healthcare, an acquisition that will give Abbott the leading market share in India for branded generics.
And while Abbott is a major pharma player, it derives close to half of its revenue from outside of prescription drugs. The company's nutritional products segment -- which includes the top-dog Similac and Ensure brands -- is seeing double-digit growth internationally.
The sunny prospects and diversification that Abbott boasts have led its stock to trade at a premium to competitors such as Merck and Pfizer. But with a still-reasonable forward price-to-earnings ratio of 11.1 and an attractive dividend yield, it's hard to say that Abbott doesn't make sense.
Tupperware
As my fellow Fool Rich Duprey recently noted, companies that decide to eschew the traditional sales and marketing route in favor of a direct-selling model often end up the butt of jokes. But personal health company Medifast seems to be proving that critics are sorely mistaken, as it treats its shareholders to impressive growth.
Of course, it's not as if we need proof that direct marketing works; Tupperware has been showing the power of the model for more than 60 years. But while Tupperware started and perfected its "party" model of direct selling in the U.S., today most of the company's sales come from outside the U.S. That international presence includes a large and fast-growing footprint in major emerging economies such as China, Brazil, the Philippines, and Turkey.
For investors, though, Tupperware's results speak for themselves. For the 10 years ending in 2009, the company has been a nice, steady grower, doubling both its sales and earnings per share. Over that same period, Tupperware consistently delivered very attractive returns on its equity and significantly improved its balance sheet.
Monsanto
Not too long ago, China seemed like it could be the answer to almost anything. Oil prices? Chinese demand will push them up. Metals prices? China. Dry bulk shipping rates? China.
And certainly, that same China chorus echoed for agriculture-related businesses like Monsanto and fertilizer specialists PotashCorp
Since Monsanto doesn't deal with the volatile phosphate and potash markets, its results didn’t crater quite as badly. However, the tough times have endured for Monsanto as it continues to face issues with Roundup, the key product in its agricultural productivity segment.
Just this week, the company announced that it will "drastically narrow" its Roundup brand portfolio, while cutting the price so that it's closer to generics. In the same release, the company projected an ongoing gross profit contribution of $250 million to $300 million from Roundup. That compares to $1.8 billion in the company's 2009 fiscal year.
While that will hurt, the herbicide business was not the most exciting piece of Monsanto to begin with. In fact, despite the Roundup troubles, the company is still projecting earnings growth in the mid-teens thanks to strong growth in its larger "seeds-and-traits" business.
Since hitting a high of $87 per share earlier this year, Monsanto's stock has cratered to just above $50. With a forward price-to-earnings ratio of 13.7, Monsanto's stock may be starting to make a lot of sense, whether or not its Roundup business ever comes back.
Getting down to business
Do you think these stocks make sense? Or is the CAPS community misplacing its faith in these companies? Head over to CAPS and join the 165,000-plus members already sharing their thoughts on thousands of stocks.
Seeking a stock that's wildly mispriced? Look no further than this find.
