This article is part of our Rising Star Portfolios series.

Building a list of companies you'd like to own, but don't yet for one reason or another is a key part of investing. Maybe the price isn't right, maybe you haven't looked into it deeply enough, whatever. Using a watchlist keeps these companies in front of you, so that you can invest in them when the time is right.

Three companies that came across my radar screen recently while looking for the next company to add to my Messed-Up Expectations (MUE) portfolio -- which invests in companies that the market is not expecting much from at all -- are Best Buy (NYSE: BBY), Dr Pepper Snapple Group (NYSE: DPS), and Ford Motor (NYSE: F).

Best Buy
When this electronics retailer reported third-quarter earnings in mid-December and said that lower demand for high-priced televisions, computers, and game software was hurting results, the stock got pummeled to the tune of 17% in just two days. And it hasn't recovered since. Does that make it a value? Or a value trap?

Well, last night's price means that the market is expecting free cash flow (FCF) annual growth of only 6.8% for five years, 3.4% for the five years after that, and then nothing after that (which I'll abbreviate as 6.8% / 3.4% / 0%) (discounting at my 15% hurdle rate). The company's grown FCF by 8.4% per year over the past five years, so the expectations might not be too far off.

Add in the fact that 3-D TV sales have been slow, which has also been hurting high-end retailer hhgregg (NYSE: HGG), and possibly won't pick up until people start upgrading from the large flat screens bought over the past couple of years, and I think it's leaning more to the "trap" side of the equation.

Dr Pepper Snapple
On the surface, Dr Pepper looks like a prime candidate for the MUE port. With trailing FCF of $1.4 billion, the market is expecting the company to actually shrink FCF on this pattern: -4.3% / -2.2% / 0%, based on last night's closing price. If it could instead hold FCF steady, there's nearly 25% upside baked into the price. Except for one thing.

In the first quarter of 2010, Dr Pepper struck a 20-year deal with PepsiCo (NYSE: PEP) in which the latter would distribute various drinks for the company. PepsiCo paid a one-time cash payment of $900 million, which promptly showed up in Dr Pepper's deferred revenue line on its balance sheet and in cash flow from operations. And that boosted FCF by a similar amount -- it got the cash, after all.

Unfortunately for the surface story, unless Dr Pepper is going around striking similar-sized deals each year going forward, that amount has to be backed out to more realistically see what is a sustainable level of FCF generation going forward. Doing that changes the FCF growth pattern to 15.9% / 7.9% / 0%, a pattern that's not nearly as "messed-up" as I like.

Much to my surprise, this company showed up on a screen I ran recently, looking for MUE candidates. The drop in price after the disappointing earnings report at the end of January hasn't really reversed itself yet, so currently, trailing FCF of $6.7 billion (note that Ford hasn't yet filed its 10-K, so that's through Sep 30, 2010) is only expected to grow with a 4.7% / 2.3% / 0% pattern. Given its aggressive debt reduction, growing sales, and intriguing new models, I suspect that's going to turn out to be significantly lower than what Ford actually delivers over the next several years. I'm definitely going to have to dig further into this one.

  • To see more news, add Ford to My Watchlist.

Come join me over on the Messed-Up Expectations discussion board to talk over these and other companies hitting your and my radars. One participant has made a compelling case for Nam Tai Electronics (NYSE: NTE) and I'm going to have to look further into that one, also.

Best Buy, Ford, and hhgregg are Motley Fool Stock Advisor selections. Pepsi is an Income Investor pick. Nam Tai Electronics is a Global Gains selection. Motley Fool Options has recommended a diagonal call position on Pepsi. The Fool owns shares of Best Buy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool analyst Jim Mueller owns shares of Pepsi and has a synthetic long on Ford. He works for the Stock Advisor newsletter service. The Motley Fool's disclosure policy is never messed up.