Editor's Choice

Don't Ignore the Boring Stocks

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

It's easy to get a little too excited about the next big thing. Investors throw their money into stocks like Tesla, 3D printing companies, or new cloud-based tech IPOs, expecting far more than these companies can realistically deliver. At the same time these investors ignore the stocks of mature companies operating in boring industries, often missing fantastic opportunities in the process. Three stocks that fall into this category, all of which I own, are Staples (NASDAQ: SPLS), Western Union (NYSE: WU), and Cisco (NASDAQ: CSCO).

Who cares about office supplies?

I first wrote about Staples in September of last year in an article entitled Staples: Overreaction and Opportunity after initially buying the stock three months earlier. At the time of the article Staples stock had fallen after disappointing earnings to a little under $11 per share, quite a bit lower than the $12.99 I originally paid for the stock. Was I worried? Did I panic and sell? Absolutely not. In fact, I bought more. About a month after the article was published I more than doubled my stake at a price of $11.69 per share.

Since then the stock has rebounded and then some, currently trading for around $16.50 per share.

<img alt="" src="http://media.ycharts.com/charts/23503399c415d87f500d05aea470db47.png" />

SPLS data by YCharts

That's about a 35% increase from my average weighted purchase price, a pretty solid return. Why was I so confident in Staples when almost everyone else was predicting doom? Because I did the best I could to block out the noise.

When people think of the office supply industry their mind goes to the big-box stores dotting the landscape. But a big part of Staples' business is the commercial segment, which sells directly to businesses, and this segment has been growing even as the retail business has been weak. Staples is also one of the largest online retailers in the country, and that segment is growing as well.

In a mature industry like office supplies it's important to buy the best company, and Staples is by far the best. Unlike its competitors Staples has been consistently profitable throughout the last decade, generating around $1 billion in free cash flow annually. At $11 per share the market capitalization was just $7.5 billion, and with very little net debt the company was very clearly a steal. Even if earnings were flat going forward the stock would still be a bargain.

The standard bear argument is that Amazon will kill Staples, but this seems exaggerated to me. Staples is actually the number two online retailer by revenue behind Amazon, and I would expect a company that focuses on doing one thing well will be a better choice for businesses than a company like Amazon that tries to do so many things at once.

At $16.50 per share Staples isn't nearly as cheap as it once was, but it's still reasonably priced. Staples pays a nice 2.9% dividend and has been actively buying back shares with its ample cash flow, so I'll be holding onto my shares even after the run-up in price. Pessimism is the friend of the long-term investor, and those who bought Staples when everyone else was selling have done well.

As boring as boring gets

Western Union is an old company in a misunderstood industry. People seem to think that the Internet will kill Western Union, but much of the company's customer base doesn't have Internet access, or even a bank account. There is a significant barrier to entry in the form of regulations - not just anyone can start sending money to Myanmar. And since most of the costs are fixed, scale is extremely important in the industry.

Western Union is the largest and most successful money transfer company, and competitive advantages should lead to long-term success. Back in October the market panicked after a disappointing earnings report, sending the stock down about a third to $12 per share. Western Union generates about $1 billion in free cash flow, and at $12 per share the market capitalization was just $7.2 billion.

Unfortunately Western Union wasn't on my radar at the time and I was unable to take advantage of that absurd price. I didn't discover the company until January when I wrote about it in an article titled A Bargain Stock Any Way You Slice It, after which I paid $13.94 for my shares. Since then the stock has surged about 23%.

<img alt="" src="http://media.ycharts.com/charts/0acbfc980fa6a7b1330a5704a133ddef.png" />

WU data by YCharts

Because Western Union generates far more cash flow than it can possibly invest back into the business, the company pays a solid 2.92% dividend and is aggressively buying back shares. Since the end of 2008 the share count has been reduced by about 23%, and these types of declines should continue.

Even at around $17 per share the stock is still attractive, and buybacks alone can drive sufficient earnings growth. The CEO recently stated that he expects revenue from the digital business to grow from $150 million today to $500 million by 2015, so there's definitely a growth story here too. Those who wrote off Western Union as a relic made a big mistake.

The past means nothing

For the past decade Cisco has been essentially range-bound, fluctuating between $15 and $30 per share. The stock is currently below where it was at the beginning of 2004. This trend leads people to argue that since Cisco hasn't done anything for the last decade the stock will continue to do nothing in the future.

This couldn't be more wrong.

The past has very little to do with the future, especially with regards to stock performance, and those who've ignored Cisco missed out an a great opportunity last year. The stock traded as low as $15 per share a little less than a year ago, and has since risen to about $25 per share.

Cisco generates around $10 billion in free cash flow per year. On top of that the company is sitting on $32 billion of net cash. At $15 per share the company's market capitalization was about $81 billion, and subtracting out the net cash brings it down to $49 billion. Cisco, the dominant player in the networking market, was trading at less than 5 times the free cash flow adjusted for cash.

Cisco was a no-brainer, and I was able to buy shares for $16.61 each soon after the stock hit its low. It was an incredible bargain which is unlikely to present itself again. Now, having risen about 50% from my purchase price, the stock is still inexpensive at about 10 times free cash flow adjusted for cash.

Cisco pays a nice 2.75% dividend and buys back plenty of shares, and along with slow but steady revenue and earnings growth the stock is a great long-term holding. You don't need fast growth to achieve high stock returns, you just need to buy quality companies at low prices. Cisco is a perfect example of this.

The bottom line

With so much excitement surrounding the hot stocks of today boring stocks are often ignored, creating an opportunity for patient investors. All three stocks have appreciated substantially since their respective lows, but each is still reasonably priced and likely worth more than the market suggests. Ignore the noise and stick to the facts, and it will be hard to go wrong.

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Timothy Green owns shares of Staples, Western Union, and Cisco. The Motley Fool recommends Cisco Systems and Western Union. The Motley Fool owns shares of Staples. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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