5 Stocks We'd Love to Own

5 Stocks We'd Love to Own

By Richard Gibbons

 

During the summer, we ran our "A Stock I'd Love to Own" contest. The rules were simple. Participants were asked to submit a short report about a great business they would hold for at least 10 years, a money-making machine that would be likely to grow and provide huge profits for years to come. Valuation didn't matter -- we were looking for superior businesses that subscribers could add to a watch list and purchase if they ever reached an attractive price. The five most compelling arguments received prizes.

 

It's been a few months since the contest ended, but there have already been some outstanding returns from contest picks. The average pick has returned about 2.5% versus 1% for the S&P 500. But some picks are already up big time. At this point, only three months later, five are up by more than 20%.

 

The results

We received about 40 entries describing companies in a multitude of sectors and with a wide range of market capitalizations. The picks and write-ups were relatively high-quality. In fact, one of the companies actually became a Motley Fool Inside Value newsletter recommendation a couple months later when it fell to a very attractive price.

 

The winner of the contest was angandgary's analysis of Canadian Natural Resources (NYSE: CNQ), an oil and gas company with significant reserves in Canada's oil sands. Angandgary noted that while oil demand continues to grow, supply is far less clear, and much of the supply that does exist is in politically unstable regions. Canadian Natural Resources, in contrast, has an estimated 40 years of reserves, is located in a friendly country, and is ideally positioned to supply oil to the U.S. market. If oil continues to skyrocket, Canadian Natural Resources will likely do well.

 

A healthy stock

SmacTrad3r's recommendation of fitness-center company Life Time Fitness (NYSE: LTM) is the fifth-best-performing pick, with returns through last Friday of 21%. SmacTrad3r noted that obesity has almost passed smoking as the No. 1 cause of preventable deaths, and that skyrocketing health-care costs increase the importance of preventing health problems before they happen.

 

Life Time Fitness is cashing in on these trends, with estimated year-over-year top-line growth of 23%, and bottom-line growth of 33%. SmacTrad3r noticed risks of increased competition, difficulty in balancing expansion versus income, and challenges in finding appropriate expansion sites. But he believes that the company has significant competitive advantages in terms of facility design, pricing, and corporate culture.

 

Something to talk about

J2 Global Communications (Nasdaq: JCOM), entered by yttire, was the fourth-best-performing pick with returns of 25%. The company sells communications services to businesses, and while it has a variety of solutions, its top-selling service is a system that enables users to receive faxes via email. Yttire admires the company's pristine balance sheet, strong cash flow, and recent annual growth rates of 25%-30%, though he expects growth to slow to 10%-15% in a few years.

 

Yttire believes J2's competitive position is strong. A partnership with Microsoft (Nasdaq: MSFT) for a free product line helps bring in new businesses that are later converted to paying customers. J2's customers are unlikely to go elsewhere, since J2 owns their business phone numbers. It is therefore relatively expensive for them to switch to a competitor. In yttire's opinion, the main risks are regulatory changes that could undermine the company's business model.

 

A moving recommendation

The third-best-performing pick, with returns of 29%, was gebinr's Expeditors International (Nasdaq: EXPD), a company focused on moving freight around the world. Gebinr admires the company's management, which has focused on long-term value and compounded the company's share price at a 28% annual rate since going public in 1984. He particularly applauds the fact that the management team answers questions on a near monthly basis in 8K filings with the SEC.

 

Gebinr sees rising fuel costs and a recession in the world's economy as the primary risks to the company. While his discounted cash flow calculations indicate that the stock is a bit overpriced, he believes the business could be a great long-term investment at a slightly lower price.

 

A strong selection

SVF018 and cjhuitt both liked Iron Mountain (NYSE: IRM), the second-best-performing pick, with returns of 29%. Iron Mountain specializes in storing the multitude of documents that other businesses produce. The company's earnings, margins, and return on equity are improving. The balance sheet could be better, as Iron Mountain has significant but manageable amounts of debt.

 

One of the most admirable things about the business is its competitive position. Iron Mountain is the low-priced document storage provider. This has resulted in it becoming the largest provider -- a significant competitive advantage when dealing with sensitive information. Finally, the hefty fees that are imposed when records are permanently removed serve to discourage its customers from switching to competitors.

 

The best of the bunch

The best-performing pick to date was invertirmenor's pick of Google (Nasdaq: GOOG), which has returned 46%. As everyone knows, Google is the leader in the search market and boasts a ridiculously high growth rate. Its strategy of allowing advertisers to bid for ad space on keywords has allowed the company to monetize its position as the most popular search engine on the Internet.

 

Google's financials are amazing. It has no debt, impressive margins, and strong return on capital. Growth seems almost certain, with the only questions being "How fast?" and "How long?" Google's valuation is the only problem that invertirmenor sees. He notes that 18 times sales and 123 times free cash flow is more than a bit pricey.

 

The Foolish bottom line

Of course, the contest was three months ago, and really, anything can happen in three months. And with 40 picks, there's a decent chance that a blind monkey throwing darts at a newspaper could identify five stocks that would have 20%-plus returns.

 

But even so, this sort of exercise has value. One of the hardest things for investors is coming up with new ideas, so it pays to constantly be on the lookout. Not all of our contest entries will outperform. But the list is a starting point; we can look through it and decide relatively quickly whether a stock meets our criteria for investment.

 

That's the strength of this sort of contest, and, in fact, the whole Inside Value community. The value investors on the discussion boards provide stock analysis that augments the newsletter recommendations. Subscribers have access to a constant stream of ideas from which they can identify the most attractive investment possibilities. If you're interested in giving the service a try, we're offering a free 30-day trial. With that trial, you'll not only be able to read about our top recommendations, but you'll also gain access to the analysis of all 40 stocks in our contest.