Pandora Is A Fundamentally Flawed Stock

One of the difficulties of evaluating firms in the nascent stage of business growth is trying to figure out the role that share dilution will have on returns. That is one of the reasons why I have never covered Pandora as an investment. It is committed to having a debt-free balance sheet, and has also lost money every year it’s been publicly traded. That combination leads to heavy share dilution: Pandora had 163 million units in 2011, and now has 215 million pieces of ownership claims (i.e. shares of stock). If you’re a long-term shareholder of Pandora, the consequence of Pandora’s delayed onset of profitability is that each share of Pandora will perpetually earn 31.9% less than would be the case if Pandora had been profitable in 2011.

This fact isn’t a deal-breaker. If a company has the possibility of earning such lucrative future profits that the returns would be … Read the rest of this article!

The Dividend Production Of A Single Exxon Share

Since 1977, Exxon has raised its dividend by 7.47% annually. This is a figure that can be a little bit misleading if you intuitively conclude that it tracks the earnings growth of the firm, as the Board of Directors decided in 1984 that a strategy dedicated equally to buybacks and dividends was in the best interest of shareholders. It’s served shareholders exceptionally well, as 6% annual growth from production expansion and commodity price increases has translated into over 9% earnings per share growth. Throw in the dividend, and Exxon shareholders have collected 13.12% annualized returns since 1977 (the results would be even better if dividend reinvestment were included, though they would be lower if held in a taxable account).

What I like about Exxon’s dividend is that it is the only firm where you can have over 95% certainty that the dividend won’t be cut, even in an extended period … Read the rest of this article!

A Speculative Investment For The Next Recession

On page 4 of the annual report for Brunswick Corporation (BC), you will encounter the following passage: “Demand for a significant portion of Brunswick’s products is seasonal, and a number of Brunswick’s Dealers are relatively small and/or highly-leveraged. As a result, many Dealers require financial assistance to support their businesses, enabling them to provide stable channels for Brunswick’s products. In addition to the financing offered by BAC, the Company may also provide its Dealers with assistance, including incentive programs, loan guarantees and inventory repurchase commitments, under which the Company is obligated to repurchase inventory from a finance company in the event of a Dealer’s default. The Company believes that these arrangements are in its best interest; however, the financial support that the Company provides to its Dealers exposes the Company to credit and business risk.”

That is a very, very important paragraph. Brunswick Corporation is one of the most fascinating Read the rest of this article!

Chipotle Stock: Growth-Stock Value Investing

There are two main ways that you can get a fair (or better) price on a stock with a strong growth profile. You can either purchase a stock when the general economy is in a recession, or you can purchase an otherwise fast-growing company during good/ordinary economic times when it is presented with a solvable crisis that makes the stock temporarily cheap.

On August 5, 2014, I gave an example of the latter when I wrote “Target: Blue-Chip Value Investing in Action” in which I discussed how the temporary problem of the hacking scandal led to a slightly distressed stock price that provided a good deal for investors with a 5+ year time horizon. Since that date, Target has delivered 23.37% annual returns compared to 8.00% annual returns from the S&P 500.

Warren Buffett created the fiction of thinking about twenty punch cards that investors are permitted to … Read the rest of this article!

Should You Buy Mastercard Stock Now?

Absent a recession, it is almost always a given that a company growing at a fast rate will trade at a premium P/E valuation compared to the S&P 500 as a whole. One of the trickier aspects of investing is trying to figure out when you should pony up and pay the premium anyway (see Nike these past seventeen years) or recognize that the valuation has become so high that it will lead to subpar returns (see Coca-Cola these past seventeen years).

Mastercard is a company that has frequently caught my eye not just for its fast growth, but for the amount of money that can be extracted without threatening the competitive position of the business. The business is truly exceptional–it generates $9.7 billion in revenues and $3.7 billion ends up flowing to the bottom-line as profit. That is a profit-to-revenue ratio of 38%. One of the best businesses in … Read the rest of this article!