Bright future puts Xerox atop watch list

It might not be obvious to the casual observer, but at recent levels, Xerox (NYSE: XRX) stock offers one of the best values in the information technology industry.

Its price-to-earnings (P/E) ratio was recently 9.7, well below its five-year average of about 18. And with its low valuation comes a hefty dividend yield, recently at 2.6 percent. Clearly, few are expecting the stock to do much over the next few years, with earnings projected to grow by 6.7 percent annually over the coming five years. But low expectations might actually turn out to be good news for investors in Xerox, as it gives the company a low hurdle to clear.

Its future is promising, as Xerox has been moving away from a hardware focus and ringing up lots of long-term service contracts, many with the federal and state governments. Xerox is generating a lot of cash from its business, too. Its free cash flow yield shows a company creating 17.4 cents of cash profit for every dollar invested in it.

Xerox may ultimately use its cash to pay bigger dividends, to buy back shares (increasing the size of your stake in the company for every share it takes off the table) or to reinvest in its business and maintain its lead over rivals for years to come. Give it some consideration.

Ask the Fool

Q: Where can I learn about which companies are doing right by their employees, their communities, the environment and so on? – L.D., Houston

A: Check out the annual list of Best Corporate Citizens published by CR magazine, which focuses on corporate responsibility. Its Top 10 honorees for 2013 are AT&T, Mattel, Bristol-Myers Squibb, Eaton, Intel, Gap, Hasbro, Merck, Campbell Soup and Coca-Cola Enterprises. (Find the entire list at thecro.com.)

The folks at ethisphere.com have named the World’s Most Ethical Companies. The 2013 list includes 145 companies, such as Alcoa, Deere, eBay, Ford, General Electric, Kellogg, Marriott, Microsoft, National Grid, PepsiCo, Safeway, Target and Sherwin-Williams.

Learn more about socially responsible companies and mutual funds that focus on them at sites such as socialfunds.com, csrwire.com and ussif.org. Or read “Socially Responsible Investing for Dummies” (For Dummies, $25) by Ann C. Logue.

My dumbest investment

Soon after becoming addicted to the financial channels, I began to invest in stocks beginning with the letter A because they appeared most often on the moving horizontal screen below. For several years I did much better than most funds and indexes, but lately I’ve really gotten battered. I’ve recently considered moving away from a vowel to one of the harder consonants, those with a Scrabble tile value above seven. Your thoughts? – C.S., Patagonia, Ariz.

The Fool responds: Considering that most stock mutual funds that are managed by pros underperform the overall market, it’s not surprising that somewhat random stock picks can do relatively well. The Wall Street Journal famously pitted professional stock pickers against a set of stocks chosen at random (in theory by darts aimed at stock listings) – and the darts did surprisingly well. When it comes to your hard-earned dollars, though, it’s best not to gamble so much. Many of us would do well to just invest in the broad-market indexes (such as S&P 500-based or whole-market-based ones) that tend to beat the pros.