From 1978 through 1998, Exxon Mobil saw its split-adjusted stock price rise from $1.43 to $31 per share. As its production of oil, natural gas, and chemicals increased over three-fold, it was able to increase its dividend from $0.05 annually to $0.82 annually. Even if you spent every single dividend that you received, you still got to witness every $10,000 invested grow into an annual passive income stream of $5,730 within twenty years. If you reinvested, your annual income flows grow into an absurd-sounding cash flow of almost $30,000 per year because the share count was increasing every 90 days and then those new shares created new dividends that repeated the process at 80 eighty intervals over the twenty-year time frame.
If you follow Warren Buffett’s Q&A session at the Berkshire Hathaway shareholder meetings, you have probably heard the Berkshire Hathaway CEO describe himself as as 85% Benjamin Graham and 15% Phil Fisher. The useful examination that follows is: In what regard is Buffett 15% Phil Fisher, and would it be wise for us to emulate likewise?
My view is that Phil Fisher’s appeal comes from plugging in answers to the limitations of Benjamin Graham’s philosophy and offering one superior edge.
The two limitations of Graham’s philosophy are that the types of bargains he found during the days of “Security Analysis” do not exist any more. Warren Buffett found an insurance operation in the 1950s trading in the $30s that was worth over triple the amount that he paid. The percent of publicly traded stock trading at a 70% to 90% discount is dramatically less than what Graham could find when he was scouring the detritus of The Great Depression.
In the past week, the investor class seems to have turned sharply negative towards Nike stock. I suppose that this sentiment shift is inevitable whenever the question “What have you done for me lately?” can yield a disappointing answer. In the past year, the stock has fallen 26% from $68 to $50. It has provoked an article from Richard Suttmeier to declare “Nike reports earnings as the worst dow performer of 2016. Shares of Nike have been kicked into bear market territory.” And another writer at Seeking Alpha declared: “Nike: Just short it.”
When Peter Lynch was asked why he wasn’t a strictly blue-chip investor, he responded: “Because there is a lot of money to be made when a business model goes from crappy to semi-crappy.” A corollary observation I’d like to add is that there are enormous cash flows coming your way when a business switches from directly running its operations to a franchise agreement that has franchisees run the operations and pay a royalty for a right to use the brand name.
Recently, I chided Applebee’s for becoming a stale, saturated brand and offering my view that any excellent returns that DineEquity (DIN) shareholders receive from this day forward will be the result of the enormous cash flows being generated at the International House of Pancakes (IHOP) subsidiary.