1 Stock to Avoid Today

This article is part of ourRising Star Portfolios series.

When I look for companies for the Messed-Up Expectations portfolio, the primary criterion is that the expected growth in free cash flow be close to or less than zero over the next several years. The next step, of course, is to determine whether the market is correct about those expectations or whether there's something being overlooked. And it is here where my judgment failed in regard to purchasing shares of Oshkosh (NYS: OSK) last December.

Unlike the situation when I purchased Textron (NYS: TXT) the first and second time -- the company was showing signs that its downward sales trend for the Cessna, Bell, and industrial divisions was turning around -- Oshkosh is still seeing downward pressure in its two biggest divisions, defense and access equipment.

Worse, operating margin for each is expected to remain in the low to mid-single digits for the remainder of this year and next year, according to management. That's going to keep net income low, which, in turn, will keep free cash flow low.

There's also the fact that days sales outstanding and days inventory outstanding have both increased substantially over the past year. I called this out as a negative when I looked at competitor General Dynamics (NYS: GD) last week. However, while that company is enjoying modest revenue growth and has double-digit operating margin, Oshkosh's is unlikely to see much revenue growth next year. At least management's expectation of "modestly lower" defense revenue could relatively easily be counteracted by higher revenues that management might be expecting from its other divisions, given the disparity between revenue levels at defense vs. everything else.

Oshkosh turned out to be a value trap in that there was a very real reason expectations were so low -- the winding down of the M-ATV program with no clear replacement in sight. What I failed to appreciate was how long that situation was likely to last.

Accordingly, the MUE portfolio will close its position in Oshkosh tomorrow.

Part of improving our investing process is learning from our mistakes. Come and discuss this decision on my Messed-Up Expectations discussion board, or follow me on Twitter.

Though Oshkosh is unlikely to go broke, it's likely to be a disappointing investment for a while. Instead, check out our free report detailing two-small cap stocks that have solid deals with the government and have the potential to deliver multibagger returns. You'll find it here: "Two Small to Fail: Two Small Caps the Government Won't Let Go Broke." It'scompletely free.

This article is part of ourRising Star Portfoliosseries, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool' s behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks.See all of our Rising Star analysts(and their portfolios).

At the time thisarticle was published Fool analystJim Muellerowns shares of Textron. He's an analyst for theMotley Fool Stock Advisornewsletter service. The Motley Fool owns shares of Textron, General Dynamics, and Oshkosh. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool'sdisclosure policyis never messed up.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.