Paired Investment Strategy

When an investor tries to find “value” with an investment purchase, there are usually two ways to do it. The first involves buying growth stocks. Here, the advantage is that the earnings per share growth rate will be greater than the S&P 500 for an extended period of time. The second involves buying value stocks. The advantage with these types of stocks is the knowledge that you’re getting a deal, and even moderate growth can deliver strong returns when coupled with P/E ratio expansion.

The downside of growth investing is that attractive businesses often trade at P/E ratios that are a bit higher than what some investors are comfortable paying, and the downside of value investing is that the discount in price is often tied to some type of ongoing problem with the business operations that may take years for the valuation to correct (because usually it takes at least … Read the rest of this article!

Selling Bad Stocks Before The Problem Materializes

Dow Chemical shareholders escaped significant capital loss in the 1960s when it sold a dietary suppressant called Ayds to Purex and then Jeffrey Martin, Inc. It was a multi-million dollar business that had become one of the leading weight loss products in the early 1980s. That strong brand, however, witnessed an 87% decline in sales between 1983 and 1988 as the HIV scare created a mental model connection with acquired immunodeficiency syndrome. Anytime you are trying to build brand equity, you must be aware of associational risks that trigger the horns and halo effect.

Previously, we have discussed how an individual person is able to generate a halo effect. Because Warren Buffett has amassed a lot of money, doesn’t engage in ostentatious displays of wealth, and has a lively sense of humor, he is able to receive the benefit of doubt in many other areas of life (people assuming his … Read the rest of this article!

Why Gilead Sciences Is So Cheap

Gilead Sciences and Google are the only two firms that have come into existence during my lifetime that I would feel comfortable classifying as very long-term buy and holds. After hitting a high of $123 in June, the price of Gilead has languished around the $100 mark–currently trading at $102 per share. This should seem at least a little bit mystifying. After all, Gilead has grown earnings by 36.5% annually over the past ten years and has an analyst consensus for growth of 22.5% in annual earnings over the next five years.

The Foster City, CA pharmaceutical giant currently earns $16.7 billion in annual profits, for a per share equivalent of $11.40. For a $102 share price, that amounts to a P/E ratio of 8.94. What gives?

There are two reasons why Gilead Sciences is trading at a valuation that seems to create such a mismatch with its historical and … Read the rest of this article!

Stocks With Lucrative Hidden Assets

For many years, shareholders of Kansas City Southern earned meager returns while the railroad business struggled and the profits went towards the purchase of seemingly unrelated businesses like the the Janus Capital Group. For most people looking upon the sprawling railroad conglomerate in 1984, there wasn’t a lot to like. Only 6% returns on capital. No record of meaningful dividend growth. And the deployment of excess profits into an obscure mutual fund group with only thirty investors (albeit thirty wealthy investors as the total assets invested exceeded $500,000,000). If online investing existed in the mid 1980s, there is no stock screener you could have run or objective criteria you could have employed that would have alerted you to Kansas City Southern as a potentially lucrative investment.

Instead, you would have to take the bucket-and-shovel approach of digging through the statement and examining the growth of this mutual fund asset that … Read the rest of this article!

Bank of America’s Bright Dividend Future

There are many people who will never own a stock that has previously cut its dividend (especially if the dividend cut occurred during a period in which they owned the stock). I find that to be an unfortunate piece of investment baggage, but I also recognize the right of everyone to invest according to the light of their own lamps. But if you are interested in weeding out suboptimal behavior, you should come to recognize that dividend cuts can often be fertile soil for deep value investment opportunities and can serve as a great launching point for high future income growth if the reason for the dividend cut was a solvable problem.

This is the situation that occurs when study Bank of America. During the financial crisis and its aftermath, Bank of America saw its share count double, the dividend got slashed, and the litigation burden became so substantial that … Read the rest of this article!