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, too much complexity can often end in calamity.

In an effort to track down companies that may fall into that "fish in a barrel" category, I've turned to The Motley Fool's CAPS community. I looked for companies with a conservative balance sheet, a dividend, annualized earnings growth of 5% or better over the past five years, a return on equity above 12%, and a high rating from the CAPS community.

Source: CAPS and Capital IQ, a Standard & Poor's company.

While the three companies above aren't meant to be formal recommendations, they do make a good starting point for further research. On that note, let's take a closer look at why these potential investments might make a whole lot of sense.

Freeport-McMoRan
Freeport has taken a shellacking in investors' recent mad rush to sell . In late April, the stock changed hands at a bit more than $80 per share; in less than a month, Mr. Market shaved about 20% off of that.

It makes sense that investors are getting skittish about Freeport right now. The company primarily produces copper, which is used for things like plumbing and electrical wiring. So just like Vale (NYSE: VALE) and its iron ore, or Alcoa (NYSE: AA) and its aluminum, when fears surface about global growth, investors will start getting cold feet about Freeport.

While most of the attention lately has centered on Europe, the real question for Freeport is how well China and the rest of Asia will hold up; their expected copper consumption in 2010 dwarfs that of anywhere else. To be sure, there have been concerns that China's growth will slow, but with first-quarter GDP growth of 11.9%, even a slower-growing China will still likely have a voracious appetite for raw materials.

Following the sell-off, Freeport's shares currently can be had for a mere eight times expected 2010 earnings. For investors who don't have a dire picture of the future, that seems like a steal.

McDonald's
There's legitimate reason for investors to be concerned about McDonald's, because the company derived more than 40% of its total 2009 revenue from Europe. Yes, the same Europe that's currently embroiled in a sovereign debt crisis. Debt issues could impact Mickey D's sales in the region, and if the euro continues to slide, the company would suddenly see the euros it earns converted into fewer dollars.

Of course, we're still talking about McDonald's here, the worldwide queen of quick-serve restaurants, and sixth-most valuable brand in the world in 2009. That ranking far exceeds those of the KFC (61) and Pizza Hut (79) brands of fellow fast-food globetrotter Yum! Brands (NYSE: YUM). Plus, when it comes to growth, the company has its sights set on -- you guessed it -- Asia.

But the pessimism has had a nice side effect; rarely have investors been able to get their hands on McDonald's stock at a valuation as low as today's. Not convinced yet? Don't overlook the fact that this blue chip is also sporting a 3.2% dividend yield right now.

Montpelier Re
Can a stock make sense when you've never even heard of it? Actually, some of the best stocks are those that most investors don't know about.

For those not familiar with Montpelier Re, the company writes large, short-tail, property and casualty catastrophe reinsurance. In other words, it's paid to assume part of the shorter-term risks that other property and casualty insurers insure directly.

In recent years, it's taken a strong stomach to stick with Montpelier. The company got absolutely hammered by hurricanes Katrina, Rita, and Wilma in 2005. And just three years later, Gustav and Ike kicked the company around a little more. Those big losses have meant precious little in the way of book value growth since the company's 2002 initial public offering.

But are turbulent times now in the company's past? While it'd be silly to expect an insurer with a focus like Montpelier's to never again endure outsized losses, a repeat of Katrina, Rita, and Wilma is unlikely. Since the end of 2005, Montpelier has grown its book value per share roughly 16% per year, a figure buoyed by stock buybacks. In addition, it's been paying dividends.

The scary losses seem to have trumped the more recent performance, though, and investors are still letting Montpelier shares change hands at a price-to-book value of just 0.7. That's cheap even beside comparable companies like OneBeacon Insurance (NYSE: OB), which is currently priced at nearly its book value.

But late last year, CAPS All-Star nonzerosum pointed out that Montpelier Re's low price could mean big gains if it doesn't repeat the big losses of the past:

[Montpelier Re] instilled a lot of fear after the two big hurricanes and all that fear is still in the price. It trades below book and generates good cash every quarter. Hopefully management has learnt its lessons - if so, this one will do 2x-3x.

Getting down to business
Now the CAPS community wants you. Do you think these stocks make sense? Or is the community off base in its faith in these companies? Head over to CAPS and join the 160,000-plus members already sharing their thoughts on thousands of stocks.

These stocks may be mispriced, but if you're looking for a stock that's wildly mispriced, you don't have to look any further than this find.