You know how Warren Buffett mentioned that if interest rates stayed at 2% for the next twenty years, stocks ought to be valued at 50x earnings, but if they average 5%, they ought to go to 15x earnings?
The political analogy is that some sectors of the economy ought to be valued a lot differently depending upon which political party controls Congress and the Presidency. Twenty years of Republican rule will give me a different valuation for defense contractors, pharmaceuticals, and heavily regulated industries compared to twenty years of Democratic rule.
The nuance is that sometimes Government does have some upsides for the corporations that I frequently discuss on the site. Namely, the use of regulations to create a barrier to entry for competition.
For example, Altria and Reynolds have created a duopoly resulting from the past three decades of smoking regulations, as the heavy litigation that resulted in the … Read the rest of this article!
The recent price drop at CVS Health (CVS) has caught my attention. As earnings at the pharmacy chain have continued to grow, the stock price has fallen from $113 to $81 in the past years as investors have needed to readjust their sanity in valuing the stock.
Last year, it was trading at $113 per share compared to trailing earnings of $4.51. This was a silly high valuation of 25x earnings for a healthcare retailer. About $5 billion in profits should have in no way justified a valuation of $124 billion. The business was incredibly strong, and was delivering impressive growth, but the stock had reached a point that was nearly double what it was worth.
Since then, earnings have continued their march forward, with CVS expected to earn $5.75 per share by the end of 2016. The stock has fallen 28% in the past year, and the stock price … Read the rest of this article!
I poked at Post Holdings recently, particularly if there are investors out there owning the shares for the exclusive purpose of securing a buyout premium with the hopes that Kellogg, General Mills, Kraft, or Nestle wants it and pays 30% above the prevailing market price to get it. The reason I don’t like it is because the default/status quo option is that the business will continue to operate as a standalone entity and will eventually return to fair value which will be an unpleasant experience for shareholders that have to deal with high debt and a 30x earnings valuation for a billion-dollar revenue business.
This does not mean that I am against having an expected buyout be a part of a thesis for making an investment. Instead, it is my view that the antecedent conditions of desirable valuation and growth exist independently of the buyout.
I’ll give you an example. … Read the rest of this article!
Patricia Yarrington, the CFO at Chevron had a great quote during the last Chevron earnings call:
“But the value of the Permian and its tremendous economic capabilities and its capital efficiencies provide great flexibility because of its short-cycle, high-return attributes. Yes, other parts of the portfolio have to compete for capital against that. So I think it raises the bar on where that incremental dollar is going to go. Permian will get the first call but we will manage it as a portfolio, and over time you should still expect us to have some significant other projects but we can pace those projects quite nicely I think and match against the opportunities the Permian provides for us.”
The Permian Basin is one of the bright spots in Chevron’s asset base. The total development cost per barrel is only around $18, making this one of the all-weather spots where Chevron operates … Read the rest of this article!
On Monday, March 9th, 2009, at approximately 4 PM, someone out there successfully placed a buy order for 10,000 common stock shares out of Starbuck’s then existing 1,460,000,000 ownership pie. This amount of overall ownership was a drop in the bucket. It only gave some guy an ownership claim on 0.00000684931% of the Seattle-based coffee empire. This wasn’t even a large enough investment position for the management to have any idea who you are if you were to show up at the annual shareholder meeting.
But yet, there was something quite special about making an investment in Starbucks on that day. The price of the stock was only $4.15 per share.
I really have no idea what people were thinking as they discarded a company with 15% annual growth for two decades as though the stock certificates were a parasitic piece of trash. The profits of $500 million were actually … Read the rest of this article!