Why Shareholder Lawsuits Against Corporations Rarely Win

If you become an officer or a director of a publicly held corporation, you will owe a duty of care to the corporation. This duty of care has three parts: (1) reasonable care; (2) good faith; and (3) reasonable belief. The reasonable care prong imposes a duty to oversee management and be informed of corporate decisionmaking; the good faith prong imposes a duty to not approve illegal, conflicting, or dishonest activity; and the reasonable belief prong imposes a duty to make decisions aimed at advancing the self-interest of the corporation.

Although these standards sound similar to negligence, they are much more stringent in application. It is extraordinarily rare for a director or officer to be found liable in court absent lawbreaking, conflict of interest, or fraud. These three rules were articulated in the 1984 Delaware Supreme Court case of Aronson v. Lewis, and although normally state court rulings are not … Read the rest of this article!

BHP Billiton Stock At $19 Per Share

A few days ago, I discussed my process for determining whether a large-cap cyclical stock may be worth purchasing during a low point in the cyclical. The three factors of the test that were most important: what are the current profits (if any) at the current low point, how worse are things expected to get, and can get the debt payments get made during current conditions or the worse expected conditions.

BHP Billiton is now trading at the lowest point since 2004. The stock is now in the teens, with the London-listing BBL trading at $19 per share. After hitting a high of $104 in 2011, investors have not been able to get away from this company first enough. Almost every article that I have read on it has an overwhelmingly negative outlook. I understand why people reach these conclusions–this morning, copper just hit a six-year low and the price … Read the rest of this article!

Why Kohl’s Is A Great Value Investment

While a teacher at Columbia University, Benjamin Graham would discourage his students from making the blanket statement, “Stock X is a great investment” or the close cousin “Stock Y is a bad investment.” The reason why Graham discouraged this line of thinking is because it ignores the extraordinarily important role that price plays in determining the expected and actual returns that an investment will generate.

If you’ve been at this site for a while, you are already familiar with the foolish habit of saying things like “Coca-Cola is a great investment” because you know that was not true for those investors that paid over 60x earnings to purchase Coca-Cola stock in the summer of 1998. The returns since then have been 2.69% annualized because the starting valuation of the stock was asinine. Some people mistakenly conclude that this is a repudiation of the notion that Coca-Cola is an excellent company, … Read the rest of this article!

Wal-Mart Stock In A Long-Term Investment Strategy

When you study Wal-Mart stock as a potential long-term investment, there are two conflicting pieces of evidence you have to resolve: (1) The dominance of Wal-Mart’s historical returns which have been over 20% annualized since 1972 as Wal-Mart has become a mega-firm that makes just shy of $15 billion in profits per year, and (2) the history of American retail reads like the rise and fall of empires because consumer retail “loyalty” isn’t really brand affection but recognition of how efficiency leads to lower prices that save them money. When that status quo changes, people will happily move on to the next offering.

Wal-Mart stock had a rough 2015 from a stock price and business performance point of view. It lost a lot of stock value, going from a high of $91 to a low of $58 and now trading at $63 per share. From March 2, 2015 through January … Read the rest of this article!

Brand Deterioration: What Doesn’t Show Up In The Numbers

Sardar Biglari, the Chairman of Biglari Holdings, has demonstrated an ability to execute an intelligent business strategy. Personally, I have been impressed with the turnaround he has orchestrated at Steak ‘N Shake. Before he purchased it, the brand was languishing even to the point that the possibility of bankruptcy could not be laughed off. If you went to Steak ‘N Shake in 2006, it would cost you $7 to $10.

The issue was that Steak ‘N Shake did have brand recognition, but it did not have brand strength pricing power at the $7 to $10 range. Just as a company’s management team can become enamored with its business and repurchase its own stock at any price, it can also overestimate the amount of pricing power that its brand has. Or it can become intoxicated with high profit margins on the retail price to customers compared to the ingredient cost.

Biglari’s … Read the rest of this article!