High-Quality Bargains Re-Emerge

There's a lot of uncertainty in investors' minds right now. Is this recovery for real or is the sovereign debt crisis going to drag us down again? Where is the next problem area going to be? How will financial reform impact the economy? Are stock valuations too high?

With so many outstanding questions, it shouldn't be too surprising that volatility has reared its ugly head again, reminding investors of the bad old days of late 2008 and early 2009. Even discounting the so-called "Flash Crash" as a trading fluke, we still seem to have returned to the days when a triple-digit loss or gain for the Dow is an everyday occurrence. With these swings, it's easy to be kept up at night worrying about your portfolio and wondering if we're perched on the precipice of another financial catastrophe.

But investors shouldn't lose their heads or radically alter their plans because of fear. Surely the world economy has challenges ahead of it, but we are nowhere near the sheer panic that marked the height of the previous crisis. Much of the world has enormous, unsustainable deficits and overall debt loads. But as most of the world returns to growth, these deficits will look less daunting, and well-executed short- and long-term austerity measures will help bring debt levels back to sustainable levels. There is no doubt the road will be bumpy, but the map is reasonably clear compared to the banking crisis.

It's true that slower-than-anticipated growth in Europe will have knock-on effects on Asian and North American growth. This will take a hit on the future earnings of firms around the world, but the impact will not be felt equally across companies. If growth slows down, businesses that are highly levered to the economic cycle and that rely heavily on discretionary spending are going to take a bigger hit than stable companies with competitive advantages.

Because the market is indiscriminately punishing firms, this volatility can be a blessing. After months of dwindling buying opportunities, some bargains are beginning to re-emerge. The downturn also has presented a good time to re-evaluate your portfolio holdings, and potentially upgrade to higher-quality stocks with better long-term prospects.

We took a look for firms with a narrow or wide economic moat, a low fair value uncertainty rating, and a 5-star rating. The low uncertainty rating means our analysts think the range of outcomes for that particular firm is fairly narrow. Even in a poor economic environment, they shouldn't see their businesses evaporate. It does mean we are basically giving up on finding a stock that could have explosive upside potential, but it also means there is only a small chance the entire firm will blow up.

The economic moat criteria give us firms with long-term competitive advantages that would make good long-term holdings. Finally, we look for cheap (5-star) stocks because even the best company can be a lousy investment if you pay too much.

Here are three firms that passed the screen. See all of them for yourself by running the screen  here using our  Premium Stock Screener. (If you're not a Premium Member, you can still access the complete screen by taking a free, 14-day trial.)

 TransCanada Corporation (TRP)
From the  Premium Analyst Report:
In the face of declining natural gas production in Alberta, TransCanada is traversing North America to pursue pipeline and power generation projects. Pipelines should continue to deliver the bulk of cash flows, but TransCanada's power generation business diversifies its cash flows, boosting long-run growth potential, in our view, despite the associated risks.

 Johnson & Johnson (JNJ)
From the  Premium Analyst Report:
J&J stands alone as a leader across the major health-care industries. The company maintains a diverse revenue base, a robust research pipeline, and exceptional cash-flow generation that together create a wide economic moat. Patent losses on antipsychotic Risperdal and neuroscience drug Topamax will weigh on near-term performance. However, we remain confident that the company's breadth can overcome these issues.

 ExxonMobil (XOM)
From the  Premium Analyst Report:
ExxonMobil sets itself apart among the other supermajors as a superior capital allocator and operator. Through a relentless pursuit of efficiency, technology, development, and operational improvement, it consistently delivers higher returns on capital relative to peers. With a majority of the world's remaining resources in government hands, opportunities for the company to grow its large production base are limited. However, we believe ExxonMobil's experience and expertise, particularly with large projects, should allow it to successfully compete for resources.

All data as of May 25, 2010