IBM Stock Will Outperform The S&P 500

The Cubs are in the World Series—if that doesn’t give a guy license to make some bold predictions, what does? Here is what I offer to you tonight: Between October 26, 2016 and October 26, 2026, the total returns of IBM will exceed the total returns of the S&P 500 Index.

It is a theory of mine that general investor behavior mirrors the “general fighting the previous war” metaphor in that the most recent successes are leaned upon to create the next round of successes, and the recent failures are abandoned because, hey, the definition of idiocy is doing the same thing over and over again and expecting a different result, right?

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Warren Buffett’s Investing Style In 1956

I found a great passage in Alice Schroeder’s “The Snowball” biography about Warren Buffett that covered his investing style in his 20s when he was running a partnership for family friends and affluent physics professor Homer Dodge:

“Every stock certificate was delivered directly to him, made out in the partnerships’ names, rather than left on deposit with a broker as was the usual practice. When they arrived, he carried them—smooth cream-colored diplomas in investing, engraved with finely etched drawings of railroads and bald eagles, sea beasts and toga-clad women—down to the Omaha National Bank in his own hands and placed them in a safe-deposited box. Whenever he sold a stock, he went to the bank, riffled through the collection of certificates, and mailed off the correct ones from the post office on 38th street. The bank would call to let him know when a dividend check came in to be deposited, and he would go there, examine the check, and endorse it personally.” See bottom of page 186.

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Tesla Stock: Still Talking Non-GAAP Earnings

More times than not, companies tout statistics other than net profits because the actual profits aren’t that good. Tesla (TSLA) is one such company that falls into this category. Today, Tesla emphasized that it is earning $0.71 per share in non-GAAP earnings. The reason they want to do that is because it makes the valuation of the stock sound slightly less insane. If they can make you think of Tesla as a company with earnings power of $2.84 per share in relation to its stock price of $200 per share, then the valuation of 70x earnings seems like something that can be justified after a couple years of 25% profit growth that matches revenue growth.

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Apple Stock: Future Performance Expectations

Things to keep in mind after Apple reported earnings yesterday:

I. Apple Sits On $237 Billion in Cash

Cue the Rodney Dangerfield because, for the last ten years, cash hasn’t been getting any respect. During a business cycle in which we see interest rates rise by at least three points, people are going to start talking about corporate balance sheets much more than they do now. If the AT&T-Time Warner merger goes through, you are going to read a lot of “Is the dividend safe?” articles about AT&T stock as it deals with $160 billion in debt in a higher rate environment (right now, AT&T’s debt is at $126 billion.)

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The British American Tobacco-Reynolds American Stock Merger

My reaction to the news that British American Tobacco (BTI) has offered about $56 per share to purchase the 58% of Reynolds American (RAI) stock that it does not currently own.

I. What is the publicly traded fair value of Reynolds stock?

Consider this: Between 1992 and 2007, Reynolds American only saw its P/E ratio dip above 13x earnings once. It was a fourteen-month period between 2006 and 2007 in which Reynolds stock traded at a valuation of 15x earnings. Other than that, Reynolds was a stock that spent the 1990s and first half of the 2000s trading between 8x earnings and 12x earnings.

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