One of the underrated areas of the industrial economy where shareholders have made a lot of money over the years is used auto repair shops. It may not look like the sexiest business, but the returns have been excellent. The gap between what mechanics are paid and what customers are charged, the gap between the cost of repair parts to the shop and the price customers pay, and the generally efficient use of real estate has proven an excellent recipe for market-beating returns for consistently long periods of time.
Bank of America made a $4.6 billion profit between April 1, 2015 and June 30, 2015. Investors are finally getting a glimpse of what Bank of America’s profit engine looks like without lawyer fees, judgments, and settlements clouding the picture. This time last year, in contrast, Bank of America only provided a $2 billion profit after all expenses were taken into consideration.
The company’s Common Equity Tier 1 Capital Ratio remained at 10.3%, unchanged over the past few quarters. This will likely put Bank of America on the path to meaningful dividend growth in the years ahead, as it’s finally past the point of having to use profits to shore up the capital base.
A counter-intuitive investment principle is this: running to a sector of the economy after it blows up often proves, in hindsight, to be one of the safest things you can do.
Take a look at something like the Nasdaq Fund, QQQ, which tracked the technology stocks affected by the dotcom bubble. Between the fund’s inception on March 10, 1999, and July 23, 2002, the fund lost almost 60% of its value. A portfolio with $100,000 in a basket of tech stocks in 1999 would have become $43,400 by the summer of 2002. And yet, history favored those that purchased technology stocks after the collapse.
Reynolds American tobacco has officially acquired Lorillard and now owns Newport, one of the strongest brands in the tobacco sector that has industry leading profits in the menthol sector and has maintained volume shipments even while the tobacco-smoking industry as a whole shrinks by 3.5% annually in the United States.
The addition of Newport has greatly increasing the per share earnings power of the company even after adjusting for dilution resulting from the acquisition. Before the transaction, Reynolds had 530 million shares outstanding and was earning $2.70 per share, or $1.4 billion in net profits.
It seems to me that there are two primary categories of successful investments that beat the S&P 500 over the long haul.
Category 1 involves buying replenished known quantities. You can look at Colgate-Palmolive or Hershey, and conclude based on past history that when the price is X and conditions Y, Z, and Q exist, the investment has been successful in the past. That informs the decision to make the investment, and gives the much needed confidence to ride through the lows.
Category 2 involves buying companies with brighter projected futures than pasts. You can look at Union Pacific in 2005, and then conclude that conditions Y,Z, and Q look better going forward, so paying X price now is actually much better than the last time. Bill Gates has had a knack of spotting this before Warren Buffett.