The key to finding market-beating stock ideas is to turn over a lot of stones. That means examining multiple companies each month in hopes of finding one that the market is mispricing.
To get after that goal, every member of our Motley Fool Global Gains research team is responsible for presenting one idea each month for the rest of the team to take a look at. While the ideas we like best end up becoming official Global Gains recommendations, there are a number of promising companies that we've passed on, waiting for either a better valuation or greater certainty regarding an aspect of their business. These companies, in other words, remain on our watch list, and I've listed two of them and the salient points regarding their investing theses below so you can add them to your watch list as well.
Potential investment thesis: Because of a confluence of events such as the decline of the euro, declining oil prices, and the threat of regulation due to the oil spill in the Gulf, Total stock is down 15% year to date, underperforming the price of oil and peers such as ExxonMobil
Potential points of failure: Sustained (i.e., more than five years) of depressed oil prices (i.e., less than $75 per BOE) could have a crippling effect on the company since some 50% of its reserves are in higher-cost locales. The company also has significant downstream exposure to Europe and derives some 50% of its revenues in euros. Given the company's activity in Africa and the Middle East, its portfolio also carries slightly more political risk than its peer group.
What we're waiting for: Either a better price or more certainty regarding the outlook for oil. Because Total's extraction costs are high, the company would be hit harder than most if oil prices were to fall from today's level.
Smith & Nephew
Potential investment thesis: This top-flight medical device manufacturer faces favorable market prospects thanks to a demographic shift to older populations around the world, rising incomes, greater insurance coverage, as well as a growing product portfolio. Focus on operational improvement should provide earning and cash flow growth above market growth rates.
Potential points of failure: Current U.S. health-care reform includes a device tax that could harm Smith & Nephew's margins as well as customer demand. And the company's products are coming under pricing pressure, which could mean further margin erosion. Health-care companies such as this are subject to significant reputational and litigation risk should one of its products prove defective.
What we're waiting for: Although Smith & Nephew appears to have an attractive market opportunity, the stock doesn't yet look like a bargain. For example, its 2.3 times EV/sales multiple and 7.6 times EV/EBITDA multiple are spot-on with the average of a peer group composed of companies such as Medtronic
Tim Hanson is co-advisor of Motley Fool Global Gains. He does not own shares of any company mentioned. Stryker is a Motley Fool Inside Value pick. Total SA is a Motley Fool Income Investor choice. The Fool owns shares of Medtronic. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.