3 Stocks That Other Investors Are Overlooking, But You Shouldn't (ABT, CVS, MDT, MSFT, WAG, WMT)

7/31/2019 3 Stocks That Other Investors Are Overlooking, But You Shouldn't (ABT, CVS, MDT, MSFT, WAG, WMT)

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3 Stocks That Other Investors AreOverlooking, but You Shouldn'tBy Matt Koppenheffer | More Articles

October 31, 2011 | Comments (10)

In his recent article "4 Gotta-Have Stocks That Are Finally Cheap Enough to Buy," my fellow

Fool Anand Chokkavelu wrote the following:

I frequently hear frustrated investors complain, "But look at the price charts ofW a l-

M a r t (NYSE:WMT ) and M icr o so ft (Nasdaq: MSFT ) . They haven't done

anything for a decade!"

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Amen. I'm an owner and a big fan of both of these stocks and have written quite a bit about

how silly I think it is that they trade at their current valuations. And while there are definitely a

good many Foolish readers on the same page as me, there are also quite a few readers who

will chime in to complain that these are terrible investments -- and will point to the lackluster

stock price chart from the past decade.

But as Anand rightly points out, while the stocks have been suffering, both companies have

been quite successful. Both have significantly grown profits, raked in gobs of cash, and paid

out a lot of that cash to investors in the form of dividends.

Unfortunately, investing isn't always as simple as buying great companies. You can buy the

greatest company out there, but if you pay too high of a price, you may struggle to make

money as the valuation comes back to earth.

Of course, this also means that just because a company's stock has been performing poorly

doesn't necessarily mean that the company is a lost cause as an investment. In fact, it could

be quite the opposite as years of poor stock performance pile up, investors increasingly give

up on the stock, and what was once a wildly overvalued stock suddenly becomes a very

attractively undervalued stock.

I think both Microsoft and Wal-Mart fit that bill. I also happen to think these three companies

do as well.

Medtronic (NYSE: MDT )

Source: S&P Capital IQ and Yahoo! Finance. Operating income = trailing-12-month operating income as of

Jan. 1 of each year.

A leader in the medical device field -- particularly when it comes to pacemakers and other

cardiac devices -- Medtronic has been anything but static over the past decade, even though

its stock hasn't done much of anything. As the graph above shows, while the stock has been



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falling, profits have been steadily rising. Combine those two and what you end up with is a

fast-falling valuation. Back in 2001 and 2002, Medtronic's stock traded at a trailing price-to-

earnings multiple in the 60s and 70s. Today it's just 12.

Of course, if you look at the numbers coming from Medtronic, it's astoundingly hard to miss

the strength of the company. Return on capital over the past 12 months has been 11.2%, the

operating profit margin was 29%, and with a 62% debt-to-equity ratio, the balance sheet is

very reasonably capitalized.

Abbott Labs (NYSE: ABT )


Jan. 1 of each year.

Some things are particularly tough to track down. Four-leaf clovers. Perfectly fitting jeans. A

low-calorie cheesecake that doesn't taste like cardboard. Dividend aristocrats.

Now Abbott Labs obviously doesn't fit most of those, but the company is, in fact, a dividend

aristocrat. That means that the company has increased its dividend every year for at least 25

years. That's a long time. That's longer than many major, well-known companies have even

been in existence. Of course, it's probably because of the requirement of that unusually long

commitment that less than 10% of the S&P 500 companies qualify for dividend aristocrat

status.

But dividend aristocrat or not, many investors would have nothing to do with Abbott today

thanks to the fact that its stock has gone nowhere over the past decade. As with Medtronic,

though, Abbott's profits have continued to climb in spite of the faltering stock price and that's

dragged down the valuation from lofty heights early in the 2000s to less than 14 currently (if

we exclude one-time charges).



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The stock currently yields 3.6% and investors stand to see some extra "value

realization" (there's some Wall Street talk for ya) as the company splits into two companies.

Walgreen (NYSE: WAG )


Jan.1 of each year.

And once again we have a stock that's done a whole lot of nothing for a very long time. But

what of the company? From the graph we can see that it's obviously been racking up profits. It

has an extremely strong balance sheet, uses its capital efficiently, and, like the other two

companies above, its valuation has fallen considerably over the years. Sure, it has a tough

archrival in CVS Caremark (NYSE: CVS ) , but it's largely a two-horse race in that market --

which ain't a bad place to be.

Oh, and remember what I was saying about Abbott being a dividend aristocrat? Well, ditto all

of that for Walgreen, because it makes the cut (CVS doesn't).

The stock, the company, and your winning portfolio

Investors sometimes make mistakes. Sometimes those are very large mistakes. However,

investors aren't stupid. When a stock is falling, there's often a good reason for it. In fact, in the

case of all three stocks above -- or all five if you include Microsoft and Wal-Mart -- there was a

good reason for the stocks to fall. The key word, of course, being "was."

Years ago, the valuations for these stocks were too high and they've been adjusting back ever

since. The companies have been fine, the stocks have just been (rightly) ill.

But after years of falling valuations, we're now left with three (or five) attractive stocks with

attractive companies behind them. So, dear reader, if lackluster stock performance has kept

you at arm's length, this Fool humbly recommends that you tune in for another look.



5/11

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You can lock on for that closer look by adding any, or all, of the stocks above to your watchlist.

If you don't have a watchlist, you can create one here.

Add Medtronic to My Watchlist.

Add Abbott Laboratories to My Watchlist.

Add Walgreen to My Watchlist.

Add Wal-Mart Stores to My Watchlist.

Add Microsoft to My Watchlist.

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The Motley Fool owns shares of Wal-Mart Stores, Abbott Laboratories, Medtronic, and

Microsoft. Motley Fool newsletter services have recommended buying shares of Microsoft,Wal-Mart Stores, and Abbott Laboratories. Motley Fool newsletter services have

recommended creating a bull call spread position in Microsoft. Motley Fool newsletter services

have recommended creating a diagonal call position in Wal-Mart Stores. Try any of our

Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but

we all believe thatconsidering a diverse range of insights makes us better investors.

Fool contributorMatt Koppenhefferowns shares of Abbott Labs, Wal-Mart, Microsoft, and

Medtronic, but does not have a financial interest in any of the other companies mentioned.

You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can

follow Matt on Twitter@KoppTheFool orFacebook. The Fool'sdisclosure policyprefersdividends over a sharp stick in the eye.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss,

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please report it via the Report this Comment icon found on every comment.

The numbers say that this is the strongest correlation between indidivdual

stocks and indexes that has ever been seen. The day when a value investor

could find a stock and hold indefinitely have disappeared with the financial

crisis.

Not true.

@jimmy4040

It's true that that's the case right now, but do you really think that that will hold

over longer timeframes?

That would suggest that pretty much all individual securities would eventually

be badly mispriced as everything converges towards some average. I don't

believe in perfectly efficient markets, but I certainly think that markets are more

efficient than that...

Matt

Did you account for increase in number of shares (dilution) in your

calculations? I think you should use market capitialization and not per share

price in your thesis.

There are two big reasons for the low valuations for medical device companies

and pharmas:

On October 31, 2011, at 3:35 PM, jimmy4040 wrote:

On October 31, 2011, at 4:38 PM, truthisntstupid wrote:

On October 31, 2011, at 5:38 PM, TMFKopp wrote:

On October 31, 2011, at 6:59 PM, nin4086 wrote:

On October 31, 2011, at 9:00 PM, jerryz11 wrote:



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1) innovation risk: can they keep coming up with profitable innovations like

before when return on investment has been barely positive for the last 10

years and more (at least for big pharmas) and regulatory hurdle for new

product approvals will be increased in the future? Even if some companies

can avoid the dry spell, it's no easy task to identify which are the lucky ones.

2) reimbursement/pricing risk: will they be paid as handsomely as before for

their products? Governments will be tightening their belt. Healthcare

expenditure is an obvious target for the inevitable budgetary axe when it's

been growing at twice the rate of the understated official inflation rate. Added

to this are the recent findings that in many cases doctors have been

"paid" (bribed may be more accurate) to recommend the devices even when

not medically needed.

Betting on the future recovery of PE multiples for these companies is betting

that things will remain more or less the same as before. That doesn't seem a

sure bet to me.

At one time or another I owned ABT, MDT, WMT, WAG, and CVS. Since I

reinvesrted dividends in my IRA I made a decent return vs. the S&P. Two

years I decided there were better companies, especially medical device

companies to invest in. I bought ISRG and have added at every major

pullback. Barring some overall financial catastrophe, I will continue to add if we

ever see a major pullback again. I would rather invest in innovation than hope

worn out stocks get revived.

It funny how companies with proven earnings growth and years of increased

dividends trade at such low valuations. But a company is only worth what

we're willing to pay for it. We don't want to pay more than 10x for MSFT but

many will pay 100x for AMZN. My guess is MSFT will continue to grow

earnings and dividends and will be a boring long term investment over the

next ten years, but AMZN will be like investing in MSFT ten years ago whereearnings will grow but share price will not.

Fool keeps touting Abbott and I just don't get it. We'll see if it's truly

undervalued.

Don't see it myself.

On October 31, 2011, at 9:42 PM, wolfhounds wrote:

On November 01, 2011, at 1:04 AM, ayaghsizian wrote:

On November 01, 2011, at 1:33 AM, youngblood58 wrote:



8/11

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Fool Disclosure

WM and T pay better.

Are you hyping ABT based on the chart presented, or based on its actual

current price? Your chart places ABT below $50 the quote on the right show a

prioce over $50.

"You can buy the greatest company out there, but if you pay too high of a

price, you may struggle to make money as the valuation comes back to earth."

At which price are you hyping ABT? The current one ($50+) on the historic

one (


9/11

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Related Tickers

ABT $53.87 -0.35 +0.00%

Abbott Laboratorie CAPS Rating:

10/31/2011 4:02 PM



10/11

CVS $36.33 -0.51 +0.00%

CVS Caremark Corp CAPS Rating:

MDT $34.74 -0.74 +0.00%

Medtronic, Inc. CAPS Rating:

MSFT $26.63 -0.35 +0.00%

Microsoft Corp CAPS Rating:

WAG $33.20 -0.61 +0.00%

Walgreen Company CAPS Rating:

WMT $56.72 -0.43 +0.00%

Wal-Mart Stores CAPS Rating:

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3 Stocks That Other Investors Are Overlooking, But You Shouldn't (ABT, CVS, MDT, MSFT, WAG, WMT)