Jesse Klein, a student at the University of Michigan, recently wrote a school newspaper column titled Relative Wealth that has widely circulated across the internet in the three days since she wrote it. The column became notorious both for its content and style—Ms. Klein argues that she is middle class despite hailing from a Silicon Valley household that makes $250,000 per year, and her writing style was not well received. There 200 comments at the time I started writing this, and I would guess there were about 10 negative comments to every 1 lukewarm/neutral comment. You can read the article here: “Relative Wealth.”
First, I’ll state my concern with Ms. Klein’s column, and my criticism of it also applies to Ms. Klein’s detractors. In one of her paragraphs, she writes: “So even though I have money, I don’t relate to a lot of people here who do. California … Read the rest of this article!
With non-cyclical mega-cap, P/E ratios actually mean something. It is very difficult for a stock to justify a P/E ratio north of 20x earnings once a business is worth over $250 billion. Earning high returns becomes quite difficult once tens of billions of dollars are involved. This is where the economic concept of “diminishing returns” originated. I think of this when I note that Apple delivered investor returns of almost 80% in 2019 even while profits barely inched upward.
From a P/E perspective, this is where Apple has averaged trading in the past ten years: 15 (2010), 14 (2011), 12 (2012), 12 (2013), 13 (2014), 12 (2015), 12 (2016), 14 (2017), 15 (2018), 16 (2019). From 2015 onward, Apple was a business that could fairly be characterized as an incredibly profitable business with $100+ billion in cash, enormous profits from iPhones driving over half of sales, and an electric array … Read the rest of this article!
As of right now, the price to acquire 1/628 millionth ownership position in Diageo stock costs $115 each. Because of the one-off items that the company has undertaken to cut costs, there is a discrepancy between reported profits over the past twelve months and the actual long-term normal profit base going forward that is indicative of the alcoholic company’s true earnings power. It’s a great way to scoop up blue-chip stocks at a discount or at least a fair price because a lot of people out there don’t have the time or patience to study the company and realize that the numbers spit out by stock screeners don’t tell you the truth about the company.
I first realized how lucrative this could be when I studied Johnson & Johnson during its multi-year stretch of prolonged manufacturing recalls in which the company appeared to be reporting profits in the high $3 … Read the rest of this article!
With the price of Apple stock having increased from $78 per share to almost $128 per share in the last year (for a gain of 64% in share price along, plus you would have to include the four dividends), it is easy to understand why Microsoft has gotten much less attention. In fact, it is almost impossible to discuss Microsoft stock in its own right without the relatively superior performance of Apple coming up in conversation. I’m not going to do that today because everyone knows Apple’s growth has been superior. Instead, I’ll tell you what I see when I study Microsoft: a company that mints cash.
Even as the company tries to spend its cash by acquiring things like Nokia phones and X-Box, and pay out $10.1 billion in annual dividends to shareholders each year, the cash hoard continues to grow. Microsoft had $77 billion in cash in … Read the rest of this article!
Imagine that, eight years ago, you had the intelligent thought: “Colgate-Palmolive is an excellent company that is worth buying anytime I can get an earnings yield of 5% or better because I like my odds when I own a company that grows profits 8-11% annually, pays out a dividend around 2.5%, and has such high profit quality that the dividend has been able to grow during every year since 1963. Plus, things like dish soap, toothbrushes and toothpaste, and household cleaning products will be around for a long time and Colgate-Palmolive owns a lot of products in those categories that people gravitate towards almost subconsciously.”
In 2007, you would have gotten a chance to own the company you desired on your terms: Colgate made $1.69 per share in profit in 2007, and would have traded at 20x earnings or below anytime that the stock price was below $33.80. Colgate traded … Read the rest of this article!