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In a previous article I describe how I evaluate a company. I work full time so, by definition, my investing activities must be part time. So I have narrowed down, to some very simple metrics that are easy to find, the criteria I look at to decide whether or not I want to invest in a company. These are the company's earnings and cash flow history, dividend history, S&P rating and the F.A.S.T. graphs.

If the earnings, cash flow and dividend history are good, then I figure the company most likely is a good investment. Therefore, I am looking for a company with a good upward trend in earnings growth and cash flow. The earnings do not have to be up every year, but the overall upward trend must be clear. For the dividend history, I look to David Fish's list of Dividend Challengers, Contenders, and Champions. The company must have been increasing dividends for at least the past 5 years, preferably 10 or more, and I would like a 5 and 10 year dividend growth rate of over 10%. The payout ratio should be below 60%.

I also look at the company's S&P rating. I don't trust in my own ability to rate the financial strength of companies, so I rely on S&P. If they give it 4 or 5 stars, that is good enough for me. Finally, I look at the F.A.S.T. Graph to see if the stock appears to be over or under priced based on the earnings, and if it shows a steady uptrend in the earnings.

That is it. The EPS record, the dividend record, the S&P rating, and the FAST Graph. All else to me is noise and overkill. I am presenting my evaluation so that other "amateur" investors who are overwhelmed by the technical speak of the financial industry, and all the confusing financial information out there, may have a simpler way of looking at things.

Using my KISS (Keep It Simple, Stupid) investing analysis, it appears to me that the following 5 stocks are undervalued. But will they make it into my portfolio? We shall see.

I have reviewed Microsoft before, but I am including it here, again, as a demonstration of what kind of stock I am looking for, and how the other 4 stocks match up.

Microsoft (NASDAQ:MSFT)

Excerpts from the S&P report about Microsoft

CORPORATE OVERVIEW. Microsoft is the world's largest software maker, primarily as a result of its near monopoly position in desktop operating systems and its Office productivity suite. The company has five operating business divisions: Windows and Windows Live, Server and Tools, Online Services Business, Microsoft Business, and Entertainment and Devices.

CORPORATE STRATEGY. The company has been slowly shifting its business strategy from a PC-centric computing environment to a computing platform in which diverse devices will access information on the Internet. MSFT has termed it "cloud computing." In the coming years, MSFT will focus on creating seamless user experiences across multiple devices, from PCs to cell phones to PDAs to home entertainment consoles and devices, for all the various tasks users engage in, from communications to productivity to ecommerce to entertainment. It also envisions delivering multiple levels of different services, some of which may be free or advertising-supported, some of which will have low prices, and some at higher pricing points, depending on the needs of the user. MSFT believes software must be sold both as an application, which resides on a user's system or network, and as a service, with the application and data residing on its servers with users gaining access via the Internet.

OUTLOOK. We expect revenues to rise 8.5% in FY 13 (Jun.) and 7.0% in FY 14, following 5.4% growth in FY 12. We see Windows and Windows Live revenue up 18% in FY 13 and 2% in FY 14, driven by an improving PC landscape and the upcoming launch of Windows 8. We project about 9% growth in Server and Tools in FY 13 and 8% in FY 14. We estimate about 6% growth in Microsoft Business in FY 13 and 12% in FY 14, on stronger enterprise spending and product upgrades. We see Entertainment and Devices revenue down 4% in FY 13 and up 5% in FY 14, including Skype and the Xbox platform. For MSFT's Online Service division in the respective fiscal years, we forecast 11% and 2% growth.

Earnings and Dividend History

Per Share Data

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

Cash Flow

2.32

3.02

2.4

1.9

2.07

1.57

1.28

1.2

0.86

1.05

Earnings

2

2.69

2.1

1.62

1.87

1.42

1.2

1.12

0.75

0.92

Dividends

0.76

0.61

0.52

0.5

0.43

0.39

0.34

3.32*

0.16

0.08

Payout Ratio

38%

23%

25%

31%

23%

27%

28%

NM

21%

9%

*included a special dividend of $3.00

EARNINGS The earnings have consistently moved higher over the past 10 years. Earnings dropped in 2004 and 2009, but immediately continued the uptrend the following year. 2013 earnings are expected to be about $2.90, once again over coming the drop in 2012 earnings. Over all, as seen in the FAST graph, MSFT has a steady uptrend in earnings.

DIVIDEND MSFT has raised its dividend every year for the past 9 years, has an average 5 year growth rate of about 12.9%, and a payout ratio consistently below 30%.

S&P RATING MSFT has a rating from S&P of 5 stars (out of five). I look for stocks that are rated either 4 or 5 stars. The S&P website shows that stocks with a rating of 4 or 5 stars significantly outperform stocks rated 3 stars or lower.

F.A.S.T. GRAPH Microsoft's F.A.S.T. graph shows that the current stock price is below the level which would be predicted by its earnings growth (the orange line). This is an indication that MSFT may be undervalued.

Summary. Microsoft passes all four of my buy criteria, so, to me MSFT is a BUY. I already own it in my portfolio, but I will be adding more shares.

Astrazeneca (NYSE:AZN)

Excerpts from the S&P report about Astrazeneca

CORPORATE OVERVIEW. Formed through the April 1999 merger of Zeneca Group PLC of the U.K. and Astra AB of Sweden, AstraZeneca ranks among the world's leading pharmaceutical companies. AZN's diverse product portfolio primarily encompasses gastrointestinal, cardiovascular, respiratory and neuroscience therapies. In 2007, AZN acquired MedImmune for some $15.6 billion in cash. MedImmune's key products were Synagis, a treatment for respiratory infections; and Flumist, an inhaled flu vaccine. Major drugs include Crestor (high cholesterol), Atacand (hyperternsion), Nexium (acid reflux), and Symbicort (asthma).

OUTLOOK. We expect sales in 2013 to decline 9% from the $28.0 billion that we estimate for 2012. In our opinion, sales of Nexium are likely to show further attrition, hurt by a more competitive proton pump inhibitor market, while sales of Seroquel, Atacand and other off-patent drugs will probably continue to slide amid generic erosion. Sales of Crestor cholesterol agent are also likely to remain under pressure from generic Lipitor. On the plus side, we see greater contributions from newer drugs such as Onglyza for type 2 diabetes, Brilinta blood thinner and recently approved Zinforo intravenous antibiotic

After a projected adjusted effective tax rate modestly higher than the 21% that we forecast for 2012, we estimate adjusted earnings per ADS of $5.54 for 2013, down from $5.74 seen for 2012.

Earnings and Dividend History

Per Share Data

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

Cash flow

8.79

7.16

6.31

5.57

4.77

4.72

3.74

3.01

2.53

2.19

Earnings

7.3

5.57

5.19

4.2

3.73

3.85

2.91

2.28

1.78

1.64

Dividends

2.7

2.41

2.09

1.9

1.75

1.41

1.02

0.84

0.73

0.7

Payout Ratio

37%

43%

40%

45%

47%

37%

35%

37%

41%

43%

EARNINGS The earnings and cash flow for AZN have gone up every year for the past ten years.

DIVIDEND AZN has raised its dividend every year for the past 9 years, has an average 5 year growth rate of 13.9%, a 10 year growth rate of 13.3%, and a payout ratio consistently below 50%.

S&P RATING AZN has a rating from S&P of only 2 stars (out of five). I look for stocks that are rated either 4 or 5 stars. The S&P website shows that stocks with a rating of 4 or 5 stars significantly outperform stocks rated 3 stars or lower.

F.A.S.T. GRAPH AZN's F.A.S.T. graph shows that the current stock price is well below the level which would be predicted by its earnings growth (the orange line). This is an indication that AZN may be under-valued.

Summary. AZN meets three out of my four criteria. This means I will put it on my watch list. The FAST graph shows that it is presently way under valued so if there are no better candidates (ones meeting all four of my criteria) I will consider buying it, especially if it's S&P rating increases.

Norfolk Southern Corp. (NYSE:NSC)

Excerpts from the S&P report about Norfolk Southern Corp.

CORPORATE OVERVIEW. Norfolk Southern provides rail transportation service in the eastern U.S., operating over 20,000 miles of road, with an extensive intermodal and coal service network and a significant general freight business, including an automotive business that is the largest in North America.

OUTLOOK. Following an estimated 0.5% decline in 2012, we look for revenues to increase 5.2% during 2013. Our view for the coming year incorporates a 3.2% improvement in volumes and a 1.9% yield gain. NSC will take additional freight away from trucking companies along the Heartland and Crescent corridors, in our view, as new terminals are opened. We also think NSC will achieve solid gains in oil shipments headed for refineries in the East. Domestic coal shipments will stabilize during the first half of the year, in our view, even as export tonnage will likely experience further declines.

Our EPS forecast for 2012 is $5.45, and incorporates an average fully diluted share count of 325.6 million, down 7.3% from the prior year. Our estimate for 2013 is $6.27, and reflects a further 3.4% reduction in share count

Earnings and Dividend History

Per Share Data

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

Cash Flow

7.93

6.25

5.05

6.63

5.63

5.5

5.02

3.83

2.4

2.5

Earnings

5.45

4

2.76

4.52

3.68

3.57

3.11

2.31

1.05

1.18

Dividends

2.09

1.4

1.36

1.22

0.96

0.68

0.48

0.46

0.3

0.26

Payout Ratio

38%

35%

49%

27%

26%

19%

15%

20%

29%

22%

EARNINGS NSC's earnings and cash flow have consistently moved higher over the past 10 years. They dropped in 2010, but immediately continued the uptrend the following year, so this is not a concern to me. It is the over-all trend that matters to me.

DIVIDEND NSC has raised its dividend every year for the past 11 years, has an average 5 year growth rate of 19.5%, A 10 yr growth rate of about 21.3%. The payout ratio consistently below 40%, and only once came close to 50%.

S&P RATING NSC has a rating from S&P of 4 stars (out of five). I look for stocks that are rated either 4 or 5 stars. The S&P website shows that stocks with a rating of 4 or 5 stars significantly outperform stocks rated 3 stars or lower.

F.A.S.T. GRAPH NSC's F.A.S.T. graph shows that the current stock price is below the level which would be predicted by its earnings growth (the orange line). This is an indication that NSC may be undervalued.

Summary. Norfolk Southern passes all four of my buy criteria, so, to me NSC is a BUY. I will be adding NSC to my portfolio in the coming weeks.

Walgreen Co. (NYSE:WAG)

Excerpts from the S&P report about Walgreen Co.

CORPORATE OVERVIEW. Walgreen operates one of the largest U.S. drug store chain based on sales, generating $71.6 billion in sales in FY 12 (Aug). The company filled about 784 million prescriptions in FY 12, accounting for about 19% of the U.S. retail prescription drug market. The company is also one of the largest operator's of drugstores in the U.S. on a unit basis, operating almost 8,400 locations in all 50 states, the District of Columbia, Puerto Rico and Guam, including over 7,900 drugstores and hospital onsite pharmacies. Its Take Care Health Systems subsidiary manages more than 700 in-store convenient care clinics and worksite health and wellness centers.

OUTLOOK. We see sales rising 1.5% in FY 13 (Aug.), to $72.7 billion, from $71.6 billion in FY 12, reflecting the signing of a new pharmacy network agreement with Express Scripts (ESRX 55, Buy), and benefits from net new store expansion and acquisitions, partially offset by a shift in product mix toward lower priced generic drugs.

We estimate the share count will rise 7.7% in FY 13 (reflecting the equity stake it took in Alliance Boots in August 2012) after declining 4.8% in FY 12 due to an active share repurchase program. As a result, we look for EPS to increase 11% in FY 13, to $3.00, from operating EPS of $2.71 in FY12, excluding acquisition-related costs.

Earnings and Dividend History

Per Share Data

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

Cash Flow

3.74

4.11

3.16

3.01

3.01

2.7

2.28

1.99

1.71

1.47

Earnings

2.42

2.94

2.12

2.02

2.17

2.03

1.72

1.52

1.32

1.14

Dividends

0.95

0.75

0.59

0.48

0.4

0.33

0.27

0.22

0.18

0.16

Payout Ratio

39%

26%

28%

24%

18%

16%

16%

15%

14%

14%

EARNINGS The earnings and cash flow for Walgreen have consistently moved higher over the past 10 years. They are down for 2012, but are expected to increase to 3.26 in 2013, which would continue the uptrend.

DIVIDEND WAG has raised its dividend every year for the past 37 years, has an average 5 year growth rate of 22.9%, and a 10 yr growth rate of about 18.9%. The payout ratio has usually been below 20%, but over the past 4 years it has risen to 39%. This is still low, but the trend is worrisome.

S&P RATING WAG has a rating from S&P of 3 stars (out of five). I look for stocks that are rated either 4 or 5 stars. The S&P website shows that stocks with a rating of 4 or 5 stars significantly outperform stocks rated 3 stars or lower.

F.A.S.T. GRAPH Walgreen's F.A.S.T. graph shows that the current stock price is slightly below the level which would be predicted by its earnings growth (the orange line). This is an indication that WAG may be undervalued.

Summary. Walgreen passes three out four of my buy criteria. This means I will put it on my watch list. The FAST graph shows that it is slightly under valued, but the rise in the payout ratio, and the drop in earnings the past year, are concerning. I will not buy WAG at this time.

Lockheed Martin Corp. (NYSE:LMT)

Excerpts from the S&P report about Lockheed Martin Corp.

CORPORATE OVERVIEW. With estimated 2011 sales of $46.5 billion, Lockheed Martin is the world's largest military weapons maker. In 2011, the company derived 82% of its net sales from the U.S. government, including the Department of Defense [DOD] as well as non-DoD agencies. Sales to foreign governments contributed 17% of net sales (up from 15% in 2010), with 1% of net sales to commercial and other customers. Lockheed Martin conducts business through four operating segments: Aeronautics; Electronic Systems; Space Systems; and Information Systems & Global Services.

OUTLOOK. We estimate flat sales in 2012, as we expect growth in Electronic Systems to be offset by a decline in IS&GS, on decreased government IT work. For 2013, we project that overall sales will continue to remain flat. We are projecting modest growth in Aeronautics, on increased low rate initial production of the F-35, and very slow growth in Electronics, offset by modest declines in IS&GS and Space Systems. However, with U.S. defense budget sequestration scheduled to take effect in January 2013, our estimates may prove to be optimistic.

We estimate EPS of $8.50 in 2012, and project an increase to $8.75 in 2013, with growth driven almost entirely by our expectation of continued large share repurchases. In 2011, LMT repurchased $2.4 billion of shares and paid $1.1 billion in cash dividends. We expect nearly $2.5 billion of free cash flow (cash from operations less capital expenditures) in 2012

Earnings and Dividend History

Per Share Data

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

Cash Flow

10.19

9.22

9.97

9.92

9.02

7.55

5.68

4.39

3.69

2.4

Earnings

7.85

7.18

7.78

7.86

7.1

5.8

4.1

2.83

2.34

1.18

Dividends

3.25

2.64

2.34

1.83

1.47

1.25

1.05

0.91

0.58

0.44

Payout Ratio

41%

37%

30%

23%

21%

22%

26%

32%

25%

37%

EARNINGS LMT's earnings have consistently moved higher over the past 10 years, but this rise has slowed over the past four years.

DIVIDEND LMT has raised its dividend every year for the past 10 years, has an average 5 year growth rate of 21.1%, and a 10 yr growth rate of about 22.1%. The payout ratio consistently below 40%.

S&P RATING LMT has a rating from S&P of 3 stars (out of five). I look for stocks that are rated either 4 or 5 stars. The S&P website shows that stocks with a rating of 4 or 5 stars significantly outperform stocks rated 3 stars or lower.

F.A.S.T. GRAPH LMT's F.A.S.T. graph shows that the current stock price is well below the level which would be predicted by its earnings growth (the orange line). This is an indication that LMT may be undervalued.

Summary. Lockheed Martin passes 3 out of my 4 criteria, failing only the S&P rating. LMT will go on my watch list, but I will not be adding it to my portfolio at the present time. If S&P increases it's rating I will reconsider whether or not to buy it.

Conclusion. MSFT, AZN, NSC, WAG and LMT are all under valued based on their F.A.S.T. Graph, but only MSFT and NSC meet all four of my buy criteria. I will be adding NSC to my portfolio and I will be adding more shares of MSFT to the position I already have. AZN, WAG and LMT will go on my watch list.

Source: Microsoft And 4 Other Undervalued Stocks