Consider this: Ebay (EBAY) is valued at $27 billion and earns $2 billion in annual profits. Ross Stores (ROST) is valued at $21 billion and earns over $1 billion in annual profits. Ebay has grown earnings by 14.5% per year for the past decade, and Ross Stores has grown earnings by 19.5% per year for the past decade.
And now consider this: Linkedin (LNKD), which is currently losing money and hasn’t earned a profit since 2013 when it posted a $26 million earnings figure, is getting bought out by Microsoft at a price of $196 per share for a $26.2 billion valuation.
That is crazy–I have no idea how you can justify this as being a better move than just launching a massive $26 billion buyback plan to retire 7% of Microsoft stock. The highest earnings estimate that I have seen from analysts covering LinkedIn is a call from Deutsche … Read the rest of this article!
There are some businesses that contain a capital structure that is doomed from the start. I had that on my mind when I was reading through the Sports Authority bankruptcy which was almost a matter of predestiny dating back to the early 2000s. When Sports Authority was rapidly expanding, it was not using organic profits to fund growth–it was diluting shareholder and filling itself up to the gills with debt to expand the store count.
When competition from Amazon, Dick’s Sporting Goods, and even general retailers turned $25 million profits into losses in the $50 million range, Sports Authority had to shutter underperforming stores. This required upfront cash to handle the one-time fees associated with closing, and also meant that Sports Authority had to enter the interest rate death spiral in which it kept refinancing its debt at higher and higher interest rates while shrinking the store count base that … Read the rest of this article!
Right after ConocoPhillips announced a 66% dividend cut in February 2016, a user with the name “nylitigator” offered this very reasonable sounding comment in response to the suggestion that Conoco was a buy:
“I don’t understand what is attractive about COP after the dividend cut. COP is down 45% or so over the last year (and I understand that one year with any energy company is way too short of a time), but COP is down 27% over the last three years and down about 15% over the last five years (I believe this takes into account the dividends received).
So if you were long COP over the last 5 years you’re still down 15% and now have an approximately 3% dividend to look forward to collecting. I have to believe that there are better places for me to invest my money.”
As a factual matter, … Read the rest of this article!
For most of this year, it has been difficult to find stocks that could, in any way, be fairly described as “undervalued.” There have been moments when Tiffany, Hershey, and Diageo have offered a modest discount, which is actually more than any investor deserves given that the earnings quality of those businesses is so high. There have also been moments when Exxon, Chevron, and Royal Dutch Shell have gotten cheap, but the investor community didn’t quite “give away” those stocks at prices that I was hoping for when the price of oil briefly dipped into the $20s. And still others, like Wells Fargo and General Electric, are trading at a pretty fair price in relation to expected dividends and earnings growth over the next decade, but require investors to get passed the mental block of knowing that the returns could have been far superior if they had acted at any … Read the rest of this article!
There were always two contradictory ideas I had to carry around in my head when I first started to study investing: (1) bank stocks have a tendency to blow up every generation or two, completely wiping out shareholder equity, and (2) Wells Fargo always found a way to survive these blow-ups and deliver exceptional returns. What’s the magic that seems to make Wells Fargo the superior bank stock investment for those that want to build sizable generational wealth?
You can look at just about any long-term period and the results are staggering. Bought Wells Fargo in 1972, on the eve of a 75% banking sector crisis? You compounded at a rate of 13.5% through the present day and needed to only put $4,000 into Wells Fargo stock to own a million dollars worth of it today. Bought it in 1981? The compounding rate of Wells Fargo stock was 14.7% annually, … Read the rest of this article!