A well-crafted watchlist is critical to smart investing: It can help you find attractive buying opportunities and it can save you from bad decisions.
After all, an investor's biggest enemy is himself. We overreact to the day's news, which leads to rushed decisions driven by emotion. A watchlist can help you slow down the process, examine the risks, and essentially take a deep, money-protecting breath.
But what to put on your watchlist? Today, Million Dollar Portfolio advisor Ron Gross shares three companies that have taken up residence on the watchlist he and his team built for the members of his service. By the way, the Fool now offers MyWatchlist.com, your customized hub to follow the performance and Fool news and commentary about the companies you're watching.
One to watch
The market gave Nvidia
But MDP analyst David Meier pointed out a potential snag when the team added Nvidia to its watchlist in July:
Over the past two years, Nvidia has spent $1.7 billion on R&D, a 43% increase over the previous two years -- yet sales have declined 19% from their high in fiscal year 2008. Does Nvidia have a competitive advantage that can translate those R&D investments into growth? Management thinks so. Still, Nvidia currently trades for just under 16 times free cash flow, accounting for its $1.8 billion in cash on the balance sheet. We don't want to pay a high multiple for a cash flow stream that may not grow, so we want to make sure that Nvidia will be able to crank out more cash.
Two to watch
But a recent article by fellow Fool Jeremy Phillips identifies a few potential stumbling blocks. The company currently sports a high P/E ratio relative to its five-year average, its debt-to-equity ratio is increasing, and its current ratio (a tool for judging short-term liquidity) is less than desirable, with current liabilities greater than its current assets. Still, as the MDP team wrote when it added Spectra to its watchlist in March, "[S]tores of natural gas remain high, according to the Energy Information Administration. This could mean lower transmission volumes in the future -- and perhaps lower prices, which could put a kink in Spectra's sales and profits. We'd love to see this volatility create an opportunity to give Spectra a place in our portfolios -- so for now, we'll watch and see what bubbles up."
Three to watch
The first quarter of 2010 was not kind to Jinpan International
There's a lot to like about Jinpan -- its management team is outstanding and the market opportunity is quite compelling. And it's one of a very few small Chinese companies that pays a dividend and has the manufacturing infrastructure in place to scale sales.
Analyst Tim Hanson wrote when Jinpan was added to the MDP watchlist:
The questions now are (1) is [the company's 2010 guidance] reasonable and (2) will the changes Jinpan made to compete on price translate to lower profit margins? We'll be taking a look at these issues ... [and] we're also hoping to delve into Jinpan's revenue distribution in China to see if a real estate downturn in tier 1 China would have a disproportionate effect on the company.
And that's exactly why it pays to watch. You can help yourself make smarter investing decisions with your own version of My Watchlist, new and free from the Fool. Click below to start following one of the three stocks mentioned above: