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 forward price-to-earnings ratio below 15, a return on capital above 10%, and a dividend. 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.

Cummins
Investors made it pretty clear that they weren't happy with Cummins' third quarter results. The gains from last year were impressive -- sales were up 34% while earnings per share tripled. But sales trailed analyst estimates and earnings per share only eked by estimates thanks to a one-time tax refund. And so investors hit the "sell" button.

Is that a little shortsighted? I'd say so. In Cummins we've got a solid, high-quality company that is in line to continue benefitting from both the current economic recovery as well as broader global growth. In fact, Cummins brought in more than 60% of its revenue from outside the U.S. and it was strong demand from areas like India and China that bolstered the third quarter results.

And it doesn't hurt that major customers like Ford (NYSE: F) and PACCAR (Nasdaq: PCAR) are seeing a boost in their businesses.

While I wouldn't say that Cummins' stock is a blue light special right now, I think it could make sense at the current level. But if investors continue let the price fall further, well, then it could make a whole lot of sense.

United Technologies
While United Technologies may not be as cyclical as Cummins, the company will still be hoping for a continued economic recovery to help drive results. The company has a very high quality collection of businesses -- including Otis elevators and escalators, Carrier climate control systems, and Pratt & Whitney aircraft engines -- but it's a group of businesses that are at their best with an economic tailwind. Of course also like Cummins, United Technologies gets a significant amount of its business from outside the U.S., so it will be a beneficiary of growth in emerging markets.

If there's a question mark for United Technologies, it might be in its businesses that are exposed to the defense market. Investors seem to be concerned that the U.S. government might have to start pinching pennies and that concern has shown up in pure-play defense stocks like Lockheed Martin (NYSE: LMT) and General Dynamics (NYSE: GD). Valuations on these stocks have fallen to notably low levels as investors worry that growth may slow.

Of course part of the beauty of United Technologies is its diversification, and while a slowdown in military spending would be a drag for the company, most of its business -- even its aerospace segments -- comes from the private market.

Similar to Cummins, I wouldn't say that United Technologies' shares are a screaming bargain right now, but I still think they could provide relatively attractive returns. But since Mr. Market has a tendency to be a bit erratic, this is definitely one for investors to keep on the radar just in case shares are put on sale.

Sysco
While the previous two stocks may be worth a close look, CAPS members clearly prefer food distributor Sysco. And I'm not inclined to disagree, as Sysco is part of my personal portfolio.

So why would investors be partial to Sysco? For one, the company is much more stable than the previous two. Few businesses like recessions -- perhaps lawyers specializing in bankruptcy being a rare exception -- but investors in Sysco are more likely than most to be saying "What recession?" The company's 2010 fiscal year ended in July with $1.99 in earnings per share, which was 24% above where the bottom line was in 2007 before the recession kicked into high gear.

To be sure, Sysco is already the market share leader in a mature industry and the vast majority of its sales come from the U.S. But it's huge marketplace that Sysco operates in and the company still sees plenty of room for growth.

And as Sysco tracks down new growth opportunities, investors are benefitting from the company's cash production. The stock currently spits out a 3.4% dividend yield and management has sunk hundreds of millions of dollars into share buybacks over the past few years.

I wish I could cap my praise for the company by saying that shares are undeniably cheap today, but Sysco's shares are pretty much in the same camp as the two stocks above -- investors can bag decent returns buying today, but I'm waiting for a better price to add to my own position.

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 170,000-plus members already sharing their thoughts on thousands of stocks.

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