The Obvious Buys in the Stock Market
Jan 22nd 2012 3:01PM
Updated Jan 22nd 2012 3:02PM
Sometimes, we overthink.
For those of us who spend our lives scouring the stock market for great deals, there's often a bias toward uncovering the next big thing or championing the fallen angel. In the worst cases, we can become the anti-Peter Lynch and end up "buying what we don't know."
So today, I want to highlight five obvious, rock-solid companies that are trading for reasonable-to-low price multiples. In other words, good stocks at good prices that I think can beat the Dow (INDEX: ^DJI) and the S&P 500 (INDEX: ^GSPC) .
Let's start off in the retail space for our first two. As we move increasingly to an e-commerce-driven society, there's a tendency to pooh-pooh anything bricks-and-mortar because of Amazon.com. The result is unfairly cheap prices for many retailers. I do think specialty retailers Best Buy and RadioShack have been beaten down unfairly and have bought shares myself, but they're closer to fallen angels than rock-solid businesses. Instead, let me point out Wal-Mart (NYS: WMT) and Target (NYS: TGT) . When I look at any other retailer, I think to myself, "Can it compete successfully with Wal-Mart, Target, and Amazon?" Usually, the answer is "No."
They define a convenient, real-time one-stop shopping experience. Unless shipping becomes instantaneous versus next-day, Wal-Mart and Target will continue to have allure. And, if you're like me, once you're there, you're loading up your cart.
Each holds moderate debt, leading to returns on equity around 20%, and each trades for 12 times next year's earnings estimates.
Now, what value investor's list of obvious buys would be complete without mentioning Warren Buffett's Berkshire Hathaway? I won't belabor the point, because it's well-worn ground. Think of Buffett's sprawling conglomerate as a mutual fund carefully constructed by the world's greatest investor. Buffett wants the company to be his legacy, so you can imagine the care he's taking to make sure his baby is built for the long haul. Last year, shares were trading so low that Buffett got the Berkshire board to approve an unprecedented potential action. When shares trade down to 1.1 times book value, Berkshire may now buy its own stock back. Shares trade at a smidge over 1.2 now. Not as low as Buffett's magic number, but still an obvious buy.
Speaking of mutual funds, Johnson & Johnson (NYS: JNJ) is known as a de facto health-care mutual fund. J&J dominates in medical devices, prescriptions, and the famous consumer goods such as Band-Aids and Tylenol. And unlike the health-care insurers, J&J will be strong regardless of just about any future regulatory scenario.
Looking long-term, I also don't believe that recent product recalls or negative legal results will significantly impair the juggernaut's prospects. J&J is trading for less than 15 times average earnings and free cash flow for the past five years and a dividend yield of 3.5%, and I continue to happily hold my shares.
Moving on to tech, it's fun to bash Microsoft. It's the big, lumbering bully to Apple's splashy it-boy. All of us cubicle dwellers complain about Windows and Office, laugh at Google's dominance over Bing in search, and perhaps defect to Chrome or Firefox over Internet Explorer. And let's not even talk about Microsoft's forays into mobile.
We can make fun all we want, but cutting away the comedy, Microsoft's Windows and Office cash cows have remained dominant and Microsoft hasn't been dying. It's been growing earnings per share at an 18.6% annual clip over the past five years. That's growth-stock-worthy. But factoring in its net cash, it's trading at less than 8 times free cash flow. Add in a 2.7% dividend yield, and Microsoft is looking mighty tasty.
I think that at today's prices, Wal-Mart, Target, Berkshire Hathaway, J&J, and Microsoft are solid businesses that are obvious buys. For some more solid companies to consider, check out our free report: "Secure Your Future With 11 Rock-Solid Dividend Stocks." It features two of these five companies. Get access to the report.
At the time this article was published Anand Chokkavelu owns shares of Microsoft, Apple, Best Buy, Johnson & Johnson, and RadioShack. The Motley Fool owns shares of Amazon.com, Berkshire Hathaway, Johnson & Johnson, Apple, Microsoft, Google, Wal-Mart Stores, RadioShack, and Best Buy. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway, Johnson & Johnson, Apple, Wal-Mart Stores, Google, Amazon.com, and Microsoft, creating a bull call spread position in Microsoft and in Apple, creating a diagonal call position in Wal-Mart Stores and in Johnson & Johnson, and writing covered calls in Best Buy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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