‘Foundation’ stocks: ‘Prudent’ trio

We like stocks. And we like a lot of ‘em. We focus on broadly diversified investments in undervalued stocks for their long-term appreciation potential.

Each month, we suggest a group of stocks that could help serve as a portfolio foundation. Here’s a look at Kraft Foods (KFT), Verizon Communications (VZ) and Waste Management (WM).

Kraft Foods is the world’s second largest food and beverage company, trailing only Nestlé.

With 51% of revenue derived outside of North America, Kraft materially altered its product portfolio and its capital structure earlier this year when it acquired control of Cadbury plc for $18 billion.

Despite the high price and associated acquisition- related risks, we believe Cadbury is a good strategic fit for Kraft which should accelerate growth and provide access to a number of developing international markets.

While many investors fear that weak consumer spending trends and rising raw material prices will pressure Kraft’s margins, we think the company has a good handle on how to manage through such an unfavorable environment, even if conditions weaken further.

Through ‘Six Sigma’ and various technology enhancements, the company is already emphasizing overhead cost reductions and improvements in productivity.

With a market cap of $55 billion and a dividend yield of 3.6%, Kraft is a dominant player and, we believe, a core holding in the Food, Beverage & Tobacco industry group.

Widely regarded as having one of the best networks in mobility, Verizon Communications offers wireless, broadband and wireline services throughout the United States.

Verizon is a perennial favorite of ours in the communications sector mostly because of its strong cash flow generation and pricing power, but also because it boasts the largest subscriber base and lowest churn rates.

We expect top-line growth to be driven by continual increases in wireless data services, especially now that Verizon can offer service on the cult-like iPhone, which your editor just picked up.

Just a few months ago, Verizon declared a 3% dividend increase despite the spinoff of cash-flow-generating properties.

Margins and revenues are strong, cash flows are booming, and there is no reason to suspect that the fat 5.3% dividend yield is in danger.

Moreover, the company has been cutting costs through staff reductions and in conjunction with landline divestitures.

A dominant player in the communications area, we view Verizon as a core holding and expect the next generation of wireless connectivity to boost margins through higher data-service usage.

It is oft said that one man’s junk is another man’s treasure. True or not, the owner of those green refuse trucks is the nation’s largest provider of collection, disposal, recycling and waste-to-energy services.

Waste Management (WM) has nearly a 30% market share and almost 40% of overall landfill capacity. The company’s revenue stream is well diversified both geographically and by business segment.

While WM continues to face headwinds from the slow-down in waste volumes from construction, the company has been able to drive increased profitability via favorable pricing and an efficient cost structure.

WM generated strong free cash flow ($1.2 billion) during 2010, which supports management’s continued efforts to return cash to shareholders in the form of dividends and share repurchases.

The company announced that it expects to pay $1.36 per share in dividends during 2011 and will allocate up to $575 million towards stock buybacks.

Considering the new dividend level, shares are trading with a current yield of 3.7%