Gilead Sciences (GILD): Very Cheap at $74

Between 2017 and 2021, net profits from the sale of Sovaldi and Harvoni ought to total somewhere around $70 billion. Based on current trends, about $30-$40 billion of that will go towards dividend payments and share repurchases that benefit the shareholders of Gilead Sciences. This means that Gilead stands to have at least $30 billion in the next five years that can be used to make acquisitions and develop other drugs.

For this reason, I consider Gilead’s current market cap of $99 billion, compared to almost $15 billion in annual profits, to be a signal of deep value at a P/E ratio of 6.7x earnings. This is crazy.

I cannot think of another time in which a stock was trading at this cheap of a valuation while bringing in more than a billion dollars in profits per month. I do understand why it has become generally disfavored–Merck has brought to … Read the rest of this article!

Berkshire Hathaway Buys Airline Stocks

In his 2008 letter to shareholders of Berkshire Hathaway, Warren Buffett described the airline industry as follows:

“The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”

On Monday, news arrived that Berkshire Hathaway had made some investments in the airline industry. Specifically, the most recent quarterly filing indicated that Berkshire Hathaway purchased $800 million in American Airlines stock, $250 million in Delta stock, $240 million in United stock, and an undisclosed amount in Southwest Airlines (the undisclosed amount reported through CNBC may indicate that Berkshire’s investment in Southwest was ongoing.)

Did Warren Buffett … Read the rest of this article!

BP Stock: Dividend Cut Possibility Creates Opportunity

“You pay a high price for a cheery consensus.” No wonder everything always comes back to Warren Buffett. How can you impart more investing wisdom about the importance of getting the valuation right than those nine words?

That quote was on my mind when I reviewed the various possibilities for someone purchasing shares of BP at different price points since 2010. An incorrect intuition that I sometimes have is the notion that, over medium periods of time, investors in the same corporation ought to earn somewhat similar results. If you buy shares of BP, you are the owner of an entity producing 1.2 million barrels of oil and oil equivalents per day, and whatever the business results of that may be, that is going to be a close approximation of what you get.

Of course business performance is important, but valuation is such an important variable that it prevents business … Read the rest of this article!

Abercrombie & Fitch Stock Down 14% Today

Last month, I wrote an article critical of Abercrombie & Fitch (ANF) stock. I said, in part:

Theoretically, the premise ought to be pretty simple: Abercrombie yields 5%, the historical performance of the S&P 500 is 10%, so all you need is the maintenance of the dividend and 5.1% earnings per share growth to beat the market.

But I am unpersuaded. The current $0.80 annual dividend payout takes up all of the earnings, and perhaps even more so, and this is fertile soil for a ripe dividend cut. And secondly, there is no five-year comparison period in the past ten years in which Abercrombie shareholders can point to growing earnings. This means that you can’t even rely upon the current $0.70 to $0.90 base to serve as a low point. Things could get worse.

And even right now, the P/E ratio of 19x earnings isn’t that attractive of an Read the rest of this article!

Best Buy Stock: Poor Investment In The Long Run

The financial management of Best Buy (BBY) has been excellent this millennium. The management team is committed to keeping large swaths of cash on hand, and the company boasts $3.4 billion in cash against $1.3 billion in debt. It has kept the dividend payout ratio low in the 30% range, and has retired gobs and gobs of stock since 2004. Approximately 490 million shares of Best Buy stock has been reduced to 317 million shares over the past twelve years, meaning that each share of Best Buy represents 35% more ownership in the business than it did in 2004.

Sounds like a decent investment opportunity, right? Au contraire, prospective investor.

The high share repurchases at Best Buy have masked the fact that revenues are in decline, net profit margins have been decreasing, and the growth of the e-commerce platform has an illusory element.

In the 1990s, Best Buy had a Read the rest of this article!