3 Stocks I Might Just Buy

A look at some stocks our global investing team is watching.

Tim Hanson
Tim Hanson
May 19, 2011 at 12:00AM

With world stock markets up 31% in 2009, 8% in 2010, and almost 10% so far this year, it has become slim pickings for those of us seeking out attractively priced global stocks. That said, there are pockets of opportunity, and I've spent time with each of the three stocks featured below over the past month trying to figure out if it's worth buying shares.

Each offers a few very attractive traits and a valuation that could be well below what's fair, but each also has obvious pitfalls or reasons to want to learn more. At this point, even after hours of reading and discussion with our global research team, I'm still wavering on all three. Maybe you can push me to one side or the other in the comments below.

But before we get to that, here are the three stocks I might just buy.

Stock No. 1: Intel
There's nothing overlooked about Intel (Nasdaq: INTC) -- a tech titan with $46 billion in sales and a market value of $125 billion -- but there may be things about it that are misunderstood. Among them is just how badly the business will be hurt by being so late to the game designing energy-efficient chips for tablets and smartphones, how capable the company is with its better than $9 billion net cash hoard to catch up, and how committed the company is to rewarding shareholders via dividends and share repurchases.

With regards to the first two issues, Intel's painful lack of foresight has been ARM Holdings' (Nasdaq: ARMH) gain and the stocks have the divergent performance to prove it. ARM is up more than 400% over the past 24 months, while Intel is up just 50%. Although ARM currently dominates the mobile and tablet chip space with its designs, Intel has also benefited from the spread of handheld technology. That's because its chips are used in the relevant servers.

Further, at Intel's analyst day on Tuesday, it argued that it would remain a growth business thanks to rising demand for high-performance computing, the increasing affordability of PCs in emerging markets, and smartphone chip offerings that would be ready to ship in 2012. These are plausible arguments, particularly since I estimate Intel is priced for just 5% annual free cash flow growth, but the great unknown is just how much tablets will co-opt PCs. And with Microsoft (Nasdaq: MSFT) opting to let its new operating system run on other chips, there is also a threat to Intel's core business.

Finally, while Intel continues to raise its dividend and increase its repurchases, it was just last year that the company acquired McAfee for $7.7 billion in a deal that continues to make little sense to me. A tech company with cash is truly a dangerous beast.

All told, I'm on the fence here. The valuation is compelling in light of device sale and connectivity growth in emerging market, but there are clear and present risks to the thesis.

Stock No. 2: Nintendo
Another sliding cyclical technology company, almost 50% of Nintendo's (NTDOY.PK) $30 billion market value is now sitting in cash. That means you're paying just 1.2 times sales and 6.7 times EBITDA for an innovative company that's previously produced blockbuster systems for the still-growing gaming market. The risk here, however, hinges on the new system planned for 2012. No one knows exactly what's in the works, but rumors are that it will be targeted at high-end gamers and previewed at next month's E3. Obviously, a system target at the high-end can't be the same magnitude of success that the Wii was, but thanks to Kinect, Android, and Apple (Nasdaq: AAPL), there's now significantly more competition in the casual gaming niche -- whether handheld or at home. But if Nintendo's new system can produce 15% to 20% growth for the company in 2012 or 2013, the stock seems like a bargain. Yet even if it can't, Nintendo has more than enough cash to see it through to the next system replacement cycle. Of course, then all of the cards will be riding on the hopes of another hit.

This is a cyclical company with innovation risk. While that's a dangerous combination, my inclination is that Nintendo's track record makes this worth a small position ahead of that E3 release, when we will find out much more about the prospects for a hit.

Stock No. 3: Country Style Cooking Restaurant
This stock is mispriced. That's because Country Style Cooking (NYSE: CCSC) -- a growing quick-serve restaurant chain in China -- is either a regional one-hit wonder and worth much less than its current $17 share price or a nascent national brand in China ... and therefore worth much more. I don't, however, know which. That's because nearly 90% of open stores at the end of 2010 were located in the company's home markets of Chongqing and Sichuan. And while the company has started expanded into new territories, I think it will take a year to get a sense for just how well the brand, concept, and food travel into new territories in China.

Yet how much is Country Style Cooking worth if it is indeed a national brand? My estimate is that if Country Style Cooking can profitably open 1,000 locations in China over the next decade, then the stock is worth at least $25 per share (it would then be a $2 billion sales business making almost $200 million per year). Yet if it can get to 1,000, then that's still only one location for every 1.4 million people in China. Here in the U.S. there is one McDonald's (NYSE: MCD) for every 22,000 people. Of course, China is not as wealthy as the U.S. on a per capita basis and there is more competition there today in this industry than when McDonald's was growing in the U.S., but if there was one Country Style Cooking for every 22,000 people in China, then the company would have more than 63,000 locations.

That, in other words, is your potential upside: somewhere between 1,000 and 63,000 locations. Whether it ends up being one, the other, or somewhere in between, there is upside for investors. The company, however, has to prove that it can expand beyond Sichuan and that management can manage rapid growth. Those two variables have me holding off for now.

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