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“No they cannot touch me for coining, I am the king himself.” –William Shakespeare,King Lear
Valuation Case Studies
Sit down with the Value-Line tear sheet and write down your thoughts. Does the company grow? Is it profitable and by how much? Good or bad balance sheet? And what would you pay and why? Then listen to the lectures and see where you agree or disagree. On Friday or the next post, I will go over each company quickly–the goal is to acquaint you with an easy search tool-Value-Line and what to look for when analyzing a company.
All corporate growth has to funnel through return on equity. The problem with growth companies and growth countries is that they so often outrun the capital with which to grow and must raise more capital. Investors grow rich not on earnings growth, but on growth in earnings per share. There is almost no evidence that faster-growing countries have higher margins. In fact, it is slightly the reverse. (CHINA!)
For there to be a stable equilibrium, assets, including entire corporations in the stock market, must sell at replacement cost. If they were to sell below that, no one would invest and instead would merely buy assets in the marketplace cheaper than they could build themselves until shortages developed and prices rose, eventually back to replacement cost, at which price a corporation would make a fair return on a new investment, etc.
The history of market returns completely supports this replacement cost view. The fact that growth companies historically have underperformed the market – probably because too much was expected of them and because they were more appealing to clients – was not accepted for decades, but by about the mid-1990s the historical data in favor of “value” stocks began to overwhelm the earlier logically appealing idea that growth should win out. It was clear that “value” or low growth stocks had won for the prior 50 years at least. This was unfortunate because the market’s faulty intuition had made it very easy for value managers or contrarians to outperform. Ah, the good old days! But now the same faulty intuition applies to fast-growing countries. (www.gmo.com 4th qtr. 2012 letter)
Value Investing News and Links
Don’t forget to go to www.grahamanddoddesville.com and www.santangelsreview.comfor their FREE value investing news emails. I would immediately go on a suicide watch if they ever stopped sending me their great links. SIGN UP! Oh, and visit their blogs as well. Both writers are thoughtful observers of the investment world.
Note what Einhorn says about Apple’s excess cash. Note also that the junk bond market is ebullient, so as night follows day, expect some buyouts–LBOs or MBOs (Dell). One search strategy might be to find companies with steady free cash flows and strong (underleveraged) balance sheet and wait ahead of the buy out announcements–owning a group of 5 to ten names.
Grant’s Feb. 8, 2013 issue quotes Bloomberg on Jan. 31:
With exclusive brands that help build customer loyalty and a FCF yield that is higher than the median of its peers, Kohl’s could be an attractive buyout candidate for a private equity firm…..The company’s real estate also adds to its appeal…. Kohl:KSS_VL 2013
But I think Coach (COH) is an even better candidate: COH_VL_Feb 2013with its higher, more consistent returns and excess cash.
Build your list because Mr. Ben Bernanke wants the $360 billion in committed unspent capital dedicated to buyout funds (Bloomberg estimate) to be spent. Source: www.grantspub.com