I asked a group of Fool analysts to name one stock they like, but believe to be too expensive at current prices. Should their prices fall, here are three ideas worth keeping an eye on.
Bryan Hinmon, Motley Fool analyst: Out of personal preference, I try only to invest in companies that are ugly or boring -- it guards against falling in love with an investment and falling asleep at the wheel. But I have always admired Expeditors International of Washington (Nasdaq: EXPD) and its fiery CEO, Peter Rose (no, no baseball or gambling affiliation here). Rose hates Wall Street analysts for their myopic and short-term thinking. He also doesn't mince words. As a result, he refuses to speak with them and communicates with the world largely via frequent 8-K releases. Always honest and forthright, he has nothing to hide. In addition, his hatred for analysts often leads to some pretty comical reading -- check it out sometime.
As for Expeditors the business, it matches up air and freight shipments with shippers who have capacity. It's like putting together a complicated puzzle made of pallets and boxes. The economics of the business are great. Expeditors is capital-light and generates high returns on capital. As a result, it has a healthy balance sheet. While Rose has plenty of ammunition for analysts, he treats employees well.
For a business of this quality, though, one must pay a price. Expeditors shares currently go for 30 times trailing earnings and commonly trade at multiples above 35, which makes me cringe. Although competing third-party logistics firms UTi Worldwide (Nasdaq: UTIW) and ground-focused LandStar Systems (Nasdaq: LSTR) are similarly expensive at the moment, they can often be had for P/Es in the low-to-mid-20s. If Expeditors shares presented themselves at 20 times earnings, I'd happily snap up shares. For now, I'm happy being a card-carrying member of the Expeditors fan club and watching the better-than-reality-TV Peter Rose show.
Jason Moser, Motley Fool analyst: Freddy Krueger might take a shine to a company I have recently been researching. Haemonetics (NYSE: HAE) focuses on blood management -- human blood management to be specific. The company develops and sells blood management solutions to hospitals, plasma centers, and blood banks.
While it does compete on some level with bigger players like Baxter (NYSE: BAX), what separates Haemonetics from the others is that it focuses solely on blood management solutions, which means it devotes its time and resources to developing cutting-edge technology. For instance, the company's CardioPAT and OrthoPAT systems are designed to actually clean the patient's blood lost during surgery in order to prep it for transfusion back into the patient. Known as surgical blood salvage, this is a real and growing alternative to traditional blood transfusions, where the patient depends on blood from donors.
Another attractive quality of the business is that it is a razor-and-blade type of model. Once the company is able to sell the equipment to the hospital or blood bank (the razor), it then realizes recurring sales of the single-use disposable devices that go with the equipment (the blades). And Haemonetics isn't stopping there. It is also developing a laser-based blood typing system that should open up new growth opportunities.
Thanks to health-care legislation, a growing population with greater access to health care means a bigger market to serve. And with additional exposure (the company markets and sells its products in more than 80 countries worldwide) to emerging markets, where health care standards continue to improve, Haemonetics has some real growth opportunities ahead. Now if I could just get it under $50 ...
Alex Pape, Motley Fool analyst: You probably can't taste the difference between triple- and quadruple-distilled rum, but I bet you are willing to pay more for a bottle of Captain Morgan's than knock-off Admiral Nelson's, despite the humor value. That's because when it comes to brands, premium liquor has some of the stickiest. British-based Diageo (NYSE: DEO) capitalizes on this stickiness with a collection of brands that includes Smirnoff, Johnnie Walker, Jose Cuervo, Bailey's, Tanqueray, Crown Royal, and, yes, Captain Morgan.
Diageo distills and distributes its products around the world, without any over-dependence on any particular region. Diageo has the largest market share by volume in the industry, with a strong presence in many of its segments. Its largest competitor, Pernod-Ricard, has 11%, but many of its competitors, including Brown-Forman (NYSE: BF-B), command just a fraction of Diageo's share. Diageo's size also allows for some serious economies of scale; adding a new brand to its international distribution network costs them almost nothing at all.
As you can probably tell, I love Diageo's business. I just can't bring myself to buy it at recent prices. All those sticky brands and that market dominance have made Diageo expensive. The current price around $63 seems to assume that the company will continue to grow its share of the liquor cabinet at the torrid rate of the past decade. Yet while there is some room for growth there, I think the low-hanging fruit has already been snatched up, so future gains in market share should be diminishing. On the plus side, though, Diageo's stock price has been volatile the last few weeks, so a lower buy-in could be just around the corner.
