Friday, November 16, 2012

5 Potential Peter Lynch Stocks

With the simple phrase "buy what you know," Peter Lynch made investing far more accessible to a wide range of potential investors.

Last week, I took a look at the home runs that my wife hit in her Motley Fool CAPS account by following that advice to a T. However, I also noted that simply sticking to that phrase and not doing any additional work can get you into trouble, so I suggested a few additional points to consider before diving in:

  • Make sure it's a company you think offers something better and not just something you are familiar with.
  • Look for signs that it's a well-managed company.
  • Buy only if you can get a fair price.
  • With those points in mind, I decided to take stroll around my house to see if there are any companies that I give my hard-earned dollars to that are worthy of an investment.

    Five that I know
    For each company, I've listed the product or service that I own or use, given a thumbs up or down on whether it's a product that is a must have for me, provided a gauge of management based on the company's return on capital, and made a call on whether the stock currently sells at a fair price.

    Company Product / Service Must Have? Well Managed? (Return on Capital*) Fair Price?
    Intel (Nasdaq: INTC  ) Intel-based computers Yes Yes (15.3%) Yes
    Amazon.com Wide range of retail purchases Yes Yes (16.8%) No
    Nike (NYSE: NKE  ) Running shoes No Yes (17.6%) No
    Tesco Fresh & Easy grocery stores Yes No (8.2%) Yes
    Dell (Nasdaq: DELL  ) Laptop Yes Yes (29.7%) Yes

    Source: S&P Capital IQ.
    *Average five-year, trailing 12-months return on capital.

    Intel
    Intel has done a tremendous job at branding, considering the company makes computer components that most consumers normally wouldn't give a second thought to. There's certainly competitive advantage in the quality of processors that Intel produces, but there's a heck of a lot to be said for the power that the "Intel Inside" sticker has to convey quality. Archrival AMD (NYSE: AMD  ) keeps fighting back, but it seems like Intel has an almost insurmountable lead.

    As far as the criteria I'm looking at, it only gets better from there. On the basis of the company's return on capital, management has done a stellar job making the most of the brand advantage and the cash that it earns. And as far as a fair price goes, investors are currently paying 10.6 times Intel's trailing earnings and less than 10 times its expected forward earnings. Need I say more?

    Amazon.com
    For me, Amazon is the first stop for just about anything I want to buy. Everything else is just a second option if Amazon doesn't carry what I'm looking for. The company's scale, along with programs like Amazon Prime that lock in customers, give it a tremendous advantage over both other Internet retailers and the bricks-and-mortar folk.

    I'm a big fan of Jeff Bezos and think he's a very sharp operator. And from the numbers, it certainly seems like the company is run wisely. If there's a fly in the Amazon ointment for me, it's that I just can't wrap my head around the stock's valuation. My fellow Fools at Motley Fool Stock Advisor newsletter service are still hot on the stock, but I can't help but wait for a price that makes more sense to me.

    Nike
    Is the "no" surprising when it comes to Nike's "must have" status for me? It should be, and it reveals why subjective estimations of a company's edge can sometimes be misleading. Though I do own Nike running gear, the swoosh doesn't compel me to buy Nike's products, and I prefer other brands in a lot of cases. However, Nike's brand is one of the most powerful in the world, and it'd be silly for me to not recognize that.

    On the topic of management effectiveness, the numbers resoundingly show that Nike's got some savvy folks at the top that know how to make the most of the company's brand power and resources. However, like Amazon, I'm not crazy about the price tag on Nike's stock. The valuation isn't as head-scratching for me as Amazon's, but it's higher than I'd be willing to pay.

    Tesco
    I've never been one to get on board for the prices at Whole Foods Market (NYSE: WFM  ) , but I've always been a big fan of its cheaper, privately held counterpart Trader Joe's. However, when Tesco started opening its small-format Fresh & Easy stores near me, I was hooked. And talking to many of my fellow Las Vegans reveals that I'm far from the only one that feels that way. But, of course, while Fresh & Easy has been growing well for Tesco, it's an exceedingly small part of the group's total revenue and was still not profitable in 2010.

    Looking at the bigger picture, it would seem that Tesco has some room for improvement when it comes to the returns it earns. Returns on capital are generally lower for grocers, but the U.S.'s Kroger (NYSE: KR  ) and Costco (Nasdaq: COST  ) are both fairly consistent about delivering double-digit returns.

    The valuation on Tesco seems pretty reasonable to me, but the package may be a more interesting if returns start climbing.

    Dell
    Put simply, I only buy Dell computers. Why? Because the process is simple, the price is right, and I've been consistently happy with the product that I've received. Of course, as I mentioned with Nike, the subjective view of one consumer is often of very little use. However, my view on Dell as a customer does highlight some potential competitive advantages such as scale, which gives it purchasing power and helps keep prices down; brand, which brings many customers knocking in the first place; and the streamlined PC-build process, which allows customers to customize their PC and receive it in a very timely matter.

    Further bolstering the case for Dell is the company's high returns on capital and low, low valuation. It probably also bears mentioning that Dell has just $7.7 billion in debt and $15.1 billion in cash and 15% of the company is still in the hands of founder and CEO Michael Dell.

    If there was a shocker of the group for me, it was Dell -- it's a stock and company that I'd long ago written off but now think could be well worth a closer look.

    Zeroing in
    I hope one or more of these stocks has caught your eye. If so, your best bet is to add the stock to your watchlist as you dig in further to figure out whether it's really worthy of a spot in your portfolio.

    • Add Intel to your watchlist.
    • Add Amazon.com to your watchlist.
    • Add Nike to your watchlist.
    • Add Tesco to your watchlist.
    • Add Dell to your watchlist.

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