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 looked for companies that have shown signs of brilliance. Specifically, I focused on 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 above 12%. I've also included the ratings that the Motley Fool CAPS community has given each of these stocks.

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.

Starbucks
For decades, Starbucks has been an impressive success story. It's grown, expanded margins, introduced successful new products, created a very strong brand, and delivered awesome returns for its investors.

But lately the sailing hasn't been quite as smooth. In recent years the company has recognized that some of its growth wasn't all that disciplined and as a result it's closed a bunch of Starbucks locations both in the U.S. and internationally. The industry has also continued to get more competitive. Not only does Starbucks continue to face-off with similar operations like Caribou Coffee and Peet's Coffee & Tea, but McDonald's (NYSE: MCD) has made a big push into the market with its McCafe line and Green Mountain Coffee Roasters (Nasdaq: GMCR) is making it easier for potential Starbucks customers to brew at home.

But does Starbucks' stock still make sense? In a lot of ways, yes. As we can see from the stock's stats listed above, Starbucks is still a very good company that's producing enviable returns and maintaining a strong balance sheet.

However, the stock's low CAPS rating probably has as much to do with valuation as it does with competition. The stock currently has a forward price-to-earnings ratio of 21, which could crimp future returns, particularly if the company can't hit the long-term growth target of 16% that analysts have projected.

Microsoft
Like Starbucks, Microsoft is an industry leader that's been under attack from competition. Google (Nasdaq: GOOG) is trying to grab a piece of Microsoft's cash-cow Office business with its Google Apps offering. The big G is also making targeted attacks on Microsoft's operating system dominance with its Android platform. And outside of Microsoft's core competence both Google and Apple (Nasdaq: AAPL) have been kicking Mister Softee's butt -- specifically in search and portable music, respectively.

Could Microsoft still make sense as an investment? Some think it first needs to save itself from swirling down the toilet of mediocrity if there's to be any hope of worthwhile returns.

I find myself a bit more bullish. Though Microsoft is facing significant challenges, it still has a very secure position in its core areas of operating systems and productivity software. The stock's P/E based on expected fiscal 2010 results is just 12.6 and as its dividend yield creeps above 2%, dividend-focused investors may start to get interested for the yield and dividend growth.

Though there are thousands of CAPS members who have a similarly optimistic view of Microsoft, growing skepticism has kept the stock at a middling three stars.

Emerson Electric
Though the CAPS community isn't convinced about either Starbucks or Microsoft, CAPS members seem pretty convinced that Emerson Electric's stock definitely makes sense. Why? Let's take a look at what they have to say.

At the end of last year, CAPS All-Star alfred13 gave the stock a thumbs up and said:

This stock is currently down with the Great Recession. It should do disproportionately better as the economy improves. A buying opportunity for a really good company with a dependable dividend.

More recently, CuriousDonkey chimed in with an endorsement of the company's dependability, remarking: "Emerson is the classic case of consistent management and consistent returns."

They're not the only ones with a positive view of Emerson either. In the Fall of last year, the Motley Fool Income Investor team added Emerson to its list of recommendations.

To be fair, the Emerson story may not be a short-term slam dunk. Sales of the products that Emerson provides -- which largely go to the industrial sector -- will depend a lot on the state of the global economy. And though we do seem to be on a path to some sort of recovery, it looks like that recovery may continue to be bumpy for a while.

Emerson's been around for well over 100 years though, so this isn't the company's first dance with recession. It has a solid balance sheet that includes more than $2 billion in cash on hand and its cash flow is more than sufficient to cover its capital expenses and dividend.

Getting down to business
Now the CAPS community wants you. That's right, do you think these stocks make sense? Or will they disappoint investors? Head over to CAPS and join the 165,000-plus members already sharing their thoughts on thousands of stocks.

Are you going to miss out on a great investment opportunity? My fellow Fool Seth Jayson thinks you need to buy these stocks before it's too late.