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 Prize-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, and 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 at why these potential investments might make a whole lot of sense.

Schlumberger
If the BP (NYSE: BP) disaster has done anything, it has highlighted the increasing complexity of the oil and gas industry and the terrible consequences that can result if that complexity isn't properly managed.

Services giant Schlumberger is there to help with just that kind of complexity. The company is a leader in numerous areas of the oilfield services industry including geophysical equipment, wireline logging, and directional drilling. And services like these are what will be required for oil and gas companies to tackle the challenges that come with drilling in harsh environments and working with unconventional products.

Schlumberger is set to extend its reach even further with the acquisition of Smith International -- a fellow oil and gas services company that Schlumberger has partnered with in the past.

With solid growth, attractive returns, and a commanding position in its industry, Schlumberger looks like it makes sense in a lot of ways. However, the stock's price tag -- currently a trailing price-to-earnings multiple of 25 -- makes me think that investors are better off nibbling right now and waiting to see if the valuation comes down.

Honeywell
As a major diversified industrial giant, Honeywell is the kind of stalwart that may seem pretty boring to many investors. So why does Honeywell make sense right now? I've got three reasons.

Moving away from hydrocarbons for energy production has made alternative energy a hot topic around the world. But just as important in the future-of-energy discussions are the strides that can easily be made when it comes to energy efficiency. Honeywell is a key player in this market and stands to benefit as both commercial and residential customers look to get green.

Honeywell is also tapping the big opportunities in emerging markets like India and China. The company has recently been making a big splash with the deals it has signed with Commercial Aircraft Corporation of China to work on its C919, a narrow-body airliner that will compete with Boeing's (NYSE: BA) 737.

And finally, Honeywell has cash. The company's balance sheet currently sports $3.5 billion in cash, and the business generates far more of the green stuff than is needed for capital spending. That means there's plenty left over for dividends, share buybacks, and growth-focused acquisitions.

So the business certainly looks pretty interesting, but what about the stock? Honeywell's valuation is more attractive than Schlumberger's, but investors may still be better off waiting for the price to come down a bit before taking too big of a bite.

ABB
When it comes to ABB's power and automation equipment, the thesis is really pretty simple. Fast-growing, developing markets like China and India are rapidly putting new infrastructure in place, while developed markets like the U.S. and Europe need to replace old, less efficient equipment. While it may have been expedient to delay some of this spending during the recession, it's not something that can be put off indefinitely.

In the years ahead, investors should expect to see ABB battle global giants like Siemens and General Electric (NYSE: GE) to grab a sizable piece of this opportunity. It's also likely that the company will look toward acquisitions to help boost growth. ABB recently lost out to Emerson Electric (NYSE: EMR) in a bid to buy the U.K.'s Chloride Group, but its willingness to step aside suggests that management has a disciplined approach to buyouts.

On CAPS, the stock has topped both Schlumberger and Honeywell by grabbing a perfect five-star rating. However, while the opportunity for ABB's business gets two thumbs up from me, I'm not so sure that the current price is all that exciting. So once again, investors may want to wait for a better price before getting too serious about ABB.

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.

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