Fiscal Cliff or Not: Three Rock Solid Stocks at Attractive Valuations

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Making market predictions is mostly a waste of time. The fiscal cliff could be a very serious problem, or perhaps not. In any case, overall economic conditions over the next years will be the result of a combination of factors, both domestic and global. Besides, the market can do well in spite of a dire economic scenario; it has been rising since 2009, regardless of all kind of economic headwinds.

Instead of worrying too much about the markets and the fiscal cliff, looking for solid companies at attractive valuations is a far more profitable use of investor's time and energy.

Good Old Berkshire

Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) is a collection of high quality businesses selected by Warren Buffett himself over the last decades. The company´s financial strength is unquestionable, and no fiscal cliff or recession whatsoever could change that. Berkshire has $42 billion in cash, and Buffett is actively hunting for investment opportunities to put that money to work. If we see a bear market over the next months, this could actually be a positive for Berkshire in the long term, because it would give Buffett the opportunity to make some big investments at bargain prices.

And Berkshire is cheap at current levels, trading at a Price to Book value barely above 1.1, the level at which Buffett is willing to buy back shares. The company's book value will continue compounding at healthy rates over the coming years, and there is little downside risk due to the current valuation. On the other hand, if shares of Berkshire were to go back to historical averages in terms of valuation, investors could enjoy some big fat gains.

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A Tasty Dividend Stock

Pepsi (NYSE: PEP) used to trade at a lower dividend yield than Coca-Cola (NYSE: KO), but now it's cheaper than its archrival. This is probably because Coke has gained market share versus Pepsi in the carbonated drink market over the last years. Pepsi, on the other hand, has been focusing more on healthy drinks and food products, a potentially more dynamic segment, but the strategy hasn't yielded the expected financial results so far.

But Pepsi is still a rock solid multinational with a dominant position in the snacks market, economies of scale, and an enormous distribution network. The company has increased its dividends in each of the last 40 consecutive years, and is currently yielding near 3.2%. This is a low risk business, and it should do well over time regardless of economic conditions.

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Apple is a Bargain

The recent fall in Apple (NASDAQ: AAPL) is one of the most debated issues in the financial media nowadays, but investors need to keep their eyes on the ball and look at the big picture. The company is trading at a P/E ratio below 12, that's a steal in comparison to its own history and in relationship to valuation levels for other big tech companies.

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Apple has one of the most valuable brands in the world, and more than $120 billion in balance sheet cash. Besides, Apple is reaching the holiday season with a completely renewed line of products, which puts the company in a very convenient position for a strong last quarter of the year. Even if there is some margin compression due to products like the iPad Mini, Apple is one of the most profitable companies on the planet, regardless of fiscal cliff.

Bottom Line

It's easy to get lost in all kind speculations about the markets, especially when prices are falling, anxiety is high and the financial media is constantly reminding us about economic problems. But that's not the best approach to investing, buying strong companies at good prices is a much better idea, and clearly a more profitable long term strategy.


acardenal owns shares of Apple and Berkshire Hathaway. The Motley Fool owns shares of Apple, Berkshire Hathaway, and PepsiCo. Motley Fool newsletter services recommend Apple, Berkshire Hathaway, The Coca-Cola Company, and PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.If you have questions about this post or the Fool’s blog network, click here for information.

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