I have been mulling over one of the seeming paradoxes of investing: Stocks that are trading in the cheapest quintile according to book value go on to outperform the other four quintiles combined by 2.5% annually over the subsequent twenty-year measuring period. It is this insight, coupled with the construction of client portfolios following this principle, that made Benjamin Graham a millionaire quickly and earned him the nickname “The Dean of Wall Street.”
And yet, Peter Lynch also stumbled upon an important insight–stocks that fall more than 50% in a three-year period go on to underperform the S&P 500 by almost five points annually over the coming decade. This insight was one of the gems of his work “One Up On Wall Street” and explained why most of his successes at the Fidelity Magellan Fund came when he purchased companies trading in the vicinity of the … Read the rest of this article!
Since June of 1998, Coca-Cola stock has returned 2.5% annually. I always keep that figure in the back of my mind, as it is a harsh reminder that getting the company right is never enough–you can’t mess up the overvaluation and drastically overpay. In a way, that 2.5% is actually an incredible testament to the enduring strength of Coca-Cola’s beverage portfolio, as the valuation shifted from 62x earnings to 19x earnings over the June 1998 through September 2015 measuring period. The fact that you were able to come close to keeping pace with inflation, despite paying almost triple what the asset is worth, is actually impressive in light of the overvaluation amount.
Although the 2015 market presents nothing quite so drastic, there are still companies trading at valuations far in excess of what is merited when you take a deep look at the growth projections, balance sheet, and historical valuation … Read the rest of this article!
Stock buybacks are one example of theory not quite holding up to reality. After the Securities & Exchange Commission issued a 1981 ruling which stated that companies will not be held liable for stock manipulation if they engage in repurchases of their own stock. Repurchases of common stock occurred before 1981, but it did not come with the explicit blessing from the SEC that civil and criminal charges for stock price manipulation would not apply.
Since then, there has been a significant debate about whether stock repurchases or significant dividend hikes are in the best interest of the shareholders. In the late 1990s, stock repurchases gained favor in corporate boardrooms, as stock options were tied to reaching earnings per share targets and the retirement of shares would help executives reach those target deals.
This is one of those big deal things in investing that you need to keep in mind–almost … Read the rest of this article!
The current analyst consensus for Pier 1 Imports (PIR) calls for the stock to trade at $30 per share within five years. Based on the current price of $8 per share, you might think that sounds like an attractive investment to consider.
I think the analysts are wrong.
This is a company that, absent a corporate buyout, will eventually be destined for bankruptcy based on fundamental changes in the business model since 2004.
For most of the company’s existence, it was a lucrative investment. It sood niche furniture, lamps, wood accessories, vases, and other bourgeoisie furnishings at 15% profit margins. For people that wanted to be stuff brand new, and wanted something nicer than the Wal-Mart or Target variety brand, it had a captive audience.
And the investment returns showed how much can be made by selling highly profitable items to the same small niche over and over again. If … Read the rest of this article!
I have not covered Anheuser-Busch stock nearly as frequently as some of the other companies that have the top slots in a consumer market segment. My hesitation for covering the stock has been a product of the Belgium headquarters which require heavy dividend taxation regardless of whether you make the investment in a regular brokerage account or a tax shelter, and the company’s staggering debt load. They have $51 billion in debt.
Last August, I argued that Anheuser-Busch would be unlikely candidate for significant earnings growth and dividend growth for the medium term, as I publicly disagreed with analysts calling for 9% annual growth. I made that prediction because I saw revenues stagnate, and I knew that retained earnings would be needed to bring the debt down to more manageable.
The 3G team did not grow the brand, but they managed to only lose a point or two of market … Read the rest of this article!