3 Stocks to Get on Your Watchlist

Sean Williams , The Motley Fool
Updated

I follow quite a lot of companies, so the usefulness of a watchlist to me cannot be overstated. Without my watchlist, I'd be unable to keep up on my favorite sectors and see what's really moving the market. Even worse, I'd be lost when the time came to choose which stock I'm buying or shorting next.

Today is Watchlist Wednesday, so I'm discussing three companies that have crossed my radar in the past week -- and at what point I may consider taking action on these calls with my own money. Keep in mind, these aren't concrete buy or sell recommendations, nor do I guarantee I'll take action on the companies being discussed weekly. What I can promise is that you can follow my real-life transactions through my profile, and that I, like everyone else here at The Motley Fool, will continue to hold the integrity of our disclosure policy in the highest regard.

Today, we're going to look at three deeply discounted value plays.


Staples (NAS: SPLS)
I'll be the first to admit that Staples' second-quarter earnings were monstrously bad on many levels and that my previous call of a bottom in the stock (as well as my CAPScall) has been wrong.

For the quarter, Staples reported $5.5 billion in revenue, falling short of Wall Street's forecast of $5.72 billion, and lowered its loose fiscal outlook to EPS growth in the low single digits from a previous outlook of growth in the high single digits. The company continues to struggle with weak small-business demand for everything from office supplies to electronic products, as well as fierce competition from OfficeMax (NYS: OMX) , which just wiped $871.5 million worth of debt off its balance sheet earlier this week, and Office Depot.

But things aren't nearly as bad for Staples as they might appear, and shareholders would be wise to keep this stock on their radar. For one, Staples' strategic locations throughout the U.S., China, and Australia make it a particularly interesting takeover candidate, be it by a public company or a private-equity firm. Second, its valuation is heavily discounted to assume a challenging small-business environment. At a forward P/E of 8 and a dividend yield of 3.6%, this is becoming a value and income investors' dream stock. Finally, Staples is reining in costs by closing underperforming stores and opening smaller, high-margin-focused stores. It won't be easy going for Staples, but the company is firmly planted on my radar and should be on yours.

Hewlett-Packard (NYS: HPQ)
Yes, Hewlett-Packard could indeed be a deeply undervalued company here. HP doesn't exactly have the best track record when it comes to delivering for shareholders recently, having reported third-quarter revenue that fell by 5%, and a 9% drop in adjusted net income. Most of the company's PC and hardware segments lost ground as HP's primary focus is on restructuring its business and laying off 27,000 workers by 2014 in the hope of saving $3 billion to $3.5 billion annually.

However, like Staples, HP still has hope. Many facets of HP's business are either showing signs of strength -- like the reported 18% growth in software revenue in the third quarter -- or offer plenty of potential, like HP's server, storage, and networking segment, which should see a dramatic boost in orders due to investments in cloud-computing. From a valuation perspective, HP at 1.1 times book value and at just 4.4 times forward earnings appears to offer a deep discount. Perhaps the biggest question mark here comes from the CEO role and Meg Whitman. HP's CEOs have been a source of controversy in the past and Whitman doesn't have a history of being an innovator. Still, HP is worth keeping a close eye on.

Aetna (NYS: AET)
As I highlighted earlier in the week, Aetna has drawn the ire of short-sellers recently who believe its purchase of Coventry Health Care (NYS: CVH) for $5.7 billion, as well as increased health care regulation from the enacting of the Affordable Care Act in full by 2014, will derail growth in the near-term. I see things a bit differently.

To begin with, the cost synergies from Aetna's buyout of Coventry are expected to reach $400 million annually by 2015. Secondly, Aetna's purchase further entrenches its involvement in government-run health care subsidies Medicare and Medicaid, which should expand dramatically under the Affordable Care Act. Third, it's evident from recent HMO pricing action that even with check and balances in place, there's little regulators can do to keep HMOs from raising their policy premiums. Finally, it's a case of valuation. With the expectation that a wider moat of members will boost Aetna's revenue, there's little risk to Aetna at just seven times forward earnings.

Foolish roundup
Is my bullishness or bearishness misplaced? Share your thoughts in the comments section below, and consider following my cue by using these links to add these companies to your free personalized Watchlist to keep up on the latest news with each company:

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The article 3 Stocks to Get on Your Watchlist originally appeared on Fool.com.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He's a total nerd when it comes to making lists. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Staples and Costco. Motley Fool newsletter services have recommended buying shares of Staples, Coventry Health Care, and Costco. Try any of our Foolish newsletter services free for 30 days. 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 that believes transparency comes first.

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