The Dow Jones Industrial Average (DJINDICES: ^DJI ) jumped again today, riding a wave that carried the S&P 500 up 1.2% and lifted the Nasdaq 1.8%. The blue chips finished the day with a gain of 129 points, or 0.9%, topping 14,800 at the closing bell.
The Dow got some help from the Federal Reserve, which released the minutes from its Open Market Committee earlier than expected. After learning that 154 people had gotten the release, including employees at some major banks, the central bank was forced to release the notes at 9 a.m. instead of the usual 2 p.m. There was little new information from the Fed, but the news seemed to confirm investors' belief that the central bankers would keep present market stimulus measures in practice until the economy improves and the unemployment rate comes down. Some at the central bank said they wanted to reduce the Fed's bond buying, but overall the market interpreted the report favorably. Hopes for a better-than-expected earnings season also appeared to drive stocks higher.
Top 10 Blue Chip Companies To Watch For 2014: McDonald's Corporation(MCD)
McDonald?s Corporation, together with its subsidiaries, operates as a worldwide foodservice retailer. It franchises and operates McDonald?s restaurants that offer various food items, soft drinks, coffee, and other beverages. As of December 31, 2009, the company operated 32,478 restaurants in 117 countries, of which 26,216 were operated by franchisees; and 6,262 were operated by the company. McDonald?s Corporation was founded in 1948 and is based in Oak Brook, Illinois.Advisors' Opinion:
- [By Brian Gorban]
Fast food giant and world-renowned company McDonald’s (NYSE: MCD) is undoubtedly a name you’ve heard of, as “the golden arches” are ubiquitous--and with good reason: The company operates over 33,000 restaurants in 119 countries. With over $27 billion in revenue and a market capitalization near $90 billion, McDonald’s is simply a juggernaut and should continue to be a beneficiary of the global growth story happening predominately in the “BRIC” (Brazil, Russia, India, and China) countries in the years and decades to come.
Of course, those countries have not been spared the current economic carnage and that has caused the company to miss the past two quarters’ consensus estimates, but that has created a buying opportunity. With the stock trading not far above its $83.31 52-week low, McDonald’s is now yielding an attractive 3.5% dividend yield, and with a low 54% payout ratio, look for the dividend to not only be safe but be raised in the near future. Add in the fact that the company has a comparatively and historically low 16x forward and trailing P/E, and I think MCD should serve investors well for the long-term while one can wait and happily collect the nice 3.5% dividend.
- [By JON C. OGG]
McDonald’s Corporation (NYSE: MCD) is at $85.08 and analysts have a consensus price target objective of $97.68. It carries a 2.9% dividend yield and the stock is down 5% from its 52-week high. McDonald’s trades at close to 6-times book value, but its return on equity is 37%. S&P carries an “A” local long-term rating on the Golden Arches. In the “you gotta eat somewhere” theory, McDonald’s seems to keep winning over and over and its shares and same-store sales keep rising handily.
Top 10 Blue Chip Companies To Watch For 2014: Colgate-Palmolive Company(CL)
Colgate-Palmolive Company, together with its subsidiaries, manufactures and markets consumer products worldwide. It offers oral care products, including toothpaste, toothbrushes, and mouth rinses, as well as dental floss and pharmaceutical products for dentists and other oral health professionals; personal care products, such as liquid hand soap, shower gels, bar soaps, deodorants, antiperspirants, shampoos, and conditioners; and home care products comprising laundry and dishwashing detergents, fabric conditioners, household cleaners, bleaches, dishwashing liquids, and oil soaps. The company offers its oral, personal, and home care products under the Colgate Total, Colgate Max Fresh, Colgate 360 Advisors' Opinion:
- [By ChuckCarlson]
Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. The company has raised distributions for 48 years in a row. The 10 year annual dividend growth rate is 12.40%/year. The last dividend increase was 9.40% to 58 cents/share. Analysts are expecting that Colgate Palmolive will earn $5.52/share in 2012. I expect that the quarterly dividend will be raised to 64 cents/share in 2012. Yield: 2.60%
5 Best Medical Stocks To Watch For 2014: Apple Inc.(AAPL)
Apple Inc., together with subsidiaries, designs, manufactures, and markets personal computers, mobile communication and media devices, and portable digital music players, as well as sells related software, services, peripherals, networking solutions, and third-party digital content and applications worldwide. The company sells its products worldwide through its online stores, retail stores, direct sales force, third-party wholesalers, resellers, and value-added resellers. In addition, it sells third-party Mac, iPhone, iPad, and iPod compatible products, including application software, printers, storage devices, speakers, headphones, and other accessories and peripherals through its online and retail stores; and digital content and applications through the iTunes Store. The company sells its products to consumer, small and mid-sized business, education, enterprise, government, and creative markets. As of September 25, 2010, it had 317 retail stores, including 233 stores in the United States and 84 stores internationally. The company, formerly known as Apple Computer, Inc., was founded in 1976 and is headquartered in Cupertino, California.Advisors' Opinion:
- [By Stephen Quickel]
Can Apple Inc. (AAPL) return to the $700 level? Whether its does or not, I suspect that the stock will be one of the outstanding comeback stories during the year ahead.
Indeed, even if it rebounds to $600 or so, that's a 20% gain. Most investors would settle for that. And chances are it will do much better over time, given Apple's knack for coming up with new products.
Short sellers have cleaned up since they began bum-rapping Apple in late 2012. Three observations are appropriate:
- The short positions, while rising rapidly early in the fall, never amounted to more than a few percent of the outstanding shares at their peak.
- The stock was probably overdue for correction, having zoomed 9-fold since March 2009.
- The consensus of 50-plus Wall Street analysts covering AAPL still calls for 20%-plus a year earnings growth going forward, with a target price of $762.
Apple, in case you hadn't noticed, is selling iPads and iPhones at record levels while its stock has been under attack, in just about every corner of the world.
- [By Roberto Pedone]
Finally, we're revisiting Apple (AAPL) this week. Last week, Apple was just starting to break out above it's the downtrending resistance line that's held shares lower for months. And sure enough, in the sessions that have followed, Apple has quietly made a move to test its last swing high at $466.
That price is the nearest important resistance level for the stock; traders should treat a move through $466 as a buy signal. If Apple's downtrend is truly broken, we'll want to see the stock make a series of higher lows and higher highs. Now, the $436 billion firm is finally in a position where it can start to do that. This week's price action could get interesting for Apple bulls.
I'm still recommending buyers keep a protective stop on the other side of the 50-day moving average; it should start looking like a decent proxy for support when a move through $466 happens.
- [By Jonas Elmerraji]
Apple (AAPL) has had a less impressive run in 2013. Shares of the tech behemoth are down around 6% since the calendar flipped over to January -- not horrific performance unless you consider the fact that the S&P 500 has gained more than 18% over that period. Ouch.
But Apple's bear run looks like it's nearing an end thanks to a multi-month breakout above the $460 level. Apple is breaking out of a double bottom pattern, a setup formed by two swing lows that take place at approximately the same price level. In AAPL's case, those swing lows bottomed out in late April and late June, and this week's breakout signals a buy.
Whenever you're looking at any technical price pattern, it's critical to think in terms of buyers and sellers. Rectangles, double bottoms and other price pattern names are a good quick way to explain what's going on in this stock, but they're not the reason it's tradable. Instead, it all comes down to supply and demand for shares.
That resistance line at $14.50, for example, is a price at which there was an excess of supply of shares; in other words, it's a place where sellers had been more eager to take recent gains and sell their shares than buyers were to buy. That's what made the move above it so significant -- the breakout indicated that buyers are finally strong enough to absorb all of the excess supply above that price level.
If you jump in here, I'd recommend putting a protective stop just below the 50-day moving average.
- [By Roberto Pedone]
Apple (AAPL), a Rocket Stock? Yes, you read it right. Despite a 15% drop in this stock's share price year-to-date, Apple is some huge upside potential ahead of it.
Right now, one of Apple's biggest catalysts comes on Sept. 10, when the firm is expected to announce a new iPhone (or iPhones) as well as a long-awaited TV. But no matter how Apple's media day ends up next month, this stock is dirt-cheap right now.
As I write, Apple sports a price-to-earnings ratio of just 11-- a tiny multiple that reflects investors' belief that the firm can't continue the breakneck growth it's achieved in recent years. But back Apple's mammoth cash position out of the equation, and Apple's P/E drops flat to 7. That's a lower cash-adjusted P/E than just about any other company in the tech sector. Apple boasts product attributes that should make it trade at a premium, not a discount: It's the only remaining PC maker that actually earns meaningful margins, it's the incumbent smart phone and tablet maker, and it owns the biggest music, video, and app ecosystem in the world.
Clearly, Apple's price is out of sync with the market now. To counter that, management has been working to provide shareholder returns of their own in the form of dividends and share buybacks. Because of the material size of Apple's cash position, those payouts could significantly concentrate Apple's shareholder base in the next few years.
AAPL is testing a long-standing resistance level. If shares clear resistance this summer, it could be the end of the downtrend.
Top 10 Blue Chip Companies To Watch For 2014: Philip Morris International Inc(PM)
Philip Morris International Inc., through its subsidiaries, engages in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States. Its international product brand line comprises Marlboro, Merit, Parliament, Virginia Slims, L&M, Chesterfield, Bond Street, Lark, Muratti, Next, Philip Morris, and Red & White. The company also offers its products under the A Mild, Dji Sam Soe, and A Hijau in Indonesia; Diana in Italy; Optima and Apollo-Soyuz in the Russian Federation; Morven Gold in Pakistan; Boston in Colombia; Belmont, Canadian Classics, and Number 7 in Canada; Best and Classic in Serbia; f6 in Germany; Delicados in Mexico; Assos in Greece; and Petra in the Czech Republic and Slovakia. It operates primarily in the European Union, Eastern Europe, the Middle East, Africa, Asia, Canada, and Latin America. The company is based in New York, New York.Advisors' Opinion:
- [By Roberto Pedone]
One stock that insiders are buying up a large amount of here is Philip Morris International (PM), which manufactures and sells cigarettes and other tobacco products in markets outside the U.S. Insiders are buying this stock into modest strength, since shares are up 5.5% so far in 2013.
Philip Morris International has a market cap of $143 billion and an enterprise value of $168 billion. This stock trades at a reasonable valuation, with a trailing price-to-earnings of 17.25 and a forward price-to-earnings of 14.6. Its estimated growth rate for this year is 4.2%, and for next year it's pegged at 11.8%. This is not a cash-rich company, since the total cash position on its balance sheet is $3.59 billion and its total debt is $25.50 billion. This stock currently sports a dividend yield of 3.8%.
A director just bought 123,500 shares, or about $11.01 million worth of stock, at $89.15 per share.
From a technical perspective, PM is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending over the last two months and change, with shares dropping from its high of $95.38 to its recent low of $85.21 a share. During that move, shares of PM have been mostly making lower highs and lower lows, which is bearish technical price action.
If you're bullish on PM, then I would look for long-biased trades as long as this stock is trending above some near-term support at $87.65 to $87 and then once it takes out its 200-day at $88.72 and its 50-day at $89.25 a share with high volume. Look for a sustained move or close above those levels with volume that hits near or above its three-month average action of 5.10 million shares. If we get that move soon, then PM will set up to re-test or possibly take out its next major overhead resistance levels at $91.40 to $92.26 a share. Any high-volume move above those levels will then put $94 to $95 into range for shares of PM.
- [By Louis Navellier]
Philip Morris International (NYSE:PM) is involved with the manufacture and sale of cigarettes and other tobacco products in over 180 countries across the globe. Year to date, PM stock is up 16%, compared to a loss of nearly 2% for the Dow Jones.
Top 10 Blue Chip Companies To Watch For 2014: Visa Inc.(V)
Visa Inc., a payments technology company, engages in the operation of retail electronic payments network worldwide. It facilitates commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses, and government entities. The company owns and operates VisaNet, a global processing platform that provides transaction processing services. It also offers a range of payments platforms, which enable credit, charge, deferred debit, debit, and prepaid payments, as well as cash access for consumers, businesses, and government entities. The company provides its payment platforms under the Visa, Visa Electron, PLUS, and Interlink brand names. In addition, it offers value-added services, including risk management, issuer processing, loyalty, dispute management, value-added information, and CyberSource-branded services. The company is headquartered in San Francisco, California.Advisors' Opinion:
- [By Charles Sizemore]
One of the “big picture” economic themes that I expect to play out over 2011 and beyond is the secular shift to a global cashless society.?Though the process is well on its way in the U.S. and Europe, roughly 40% of all transactions are still made with cash and paper checks according to Barron’s.
This means that even in “boring” developed markets, there is ample room for growth in electronic payments. And there is no better company to benefit from this trend than credit card giant Visa (NYSE: V).
Top 10 Blue Chip Companies To Watch For 2014: Chevron Corporation(CVX)
Chevron Corporation, through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. It operates in two segments, Upstream and Downstream. The Upstream segment involves in the exploration, development, and production of crude oil and natural gas; processing, liquefaction, transportation, and regasification associated with liquefied natural gas; transportation of crude oil through pipelines; and transportation, storage, and marketing of natural gas, as well as holds interest in a gas-to-liquids project. The Downstream segment engages in the refining of crude oil into petroleum products; marketing of crude oil and refined products primarily under the Chevron, Texaco, and Caltex brand names; transportation of crude oil and refined products by pipeline, marine vessel, motor equipment, and rail car; and manufacture and marketing of commodity petrochemicals, plastics for industrial uses, and fuel and lubricant additives. It a lso produces and markets coal and molybdenum; and holds interests in 13 power assets with a total operating capacity of approximately 3,100 megawatts, as well as involves in cash management and debt financing activities, insurance operations, real estate activities, energy services, and alternative fuels and technology business. Chevron Corporation has a joint venture agreement with China National Petroleum Corporation. The company was formerly known as ChevronTexaco Corp. and changed its name to Chevron Corporation in May 2005. Chevron Corporation was founded in 1879 and is based in San Ramon, California.Advisors' Opinion:
- [By Hawkinvest]
Chevron Corporation (CVX) is a leading integrated energy company with exposure to oil, natural gas, refining, etc. This could be one of the most undervalued stocks in the market. Chevron pays a dividend that beats many other stock and bond yields, plus it has a below market price to earnings ratio of about 8 times earnings. The average stock in the S&P 500 Index currently trades for over 12 times earnings. If oil prices continue to rise, the already healthy profit estimates for Chevron might be too low. With oil prices showing strength this early in the season, Chevron could be poised to beat earnings in the coming months. However, the stock is trading at the upper end of the recent trading range. Recently, it has been possible to buy this stock at about $102 per share, so waiting for dips could pay off.
Here are some key points for CVX:
Current share price: $104.25
The 52 week range is $85.63 to $110.01
Earnings estimates for 2012: $12.66 per share
Earnings estimates for 2013: $13.20 per share
Annual dividend: $3.42 per share which yields 3.1%
- [By GuruFocus] Tom Gayner initiated holdings in Chevron Corp. His purchase prices were between $114.81 and $126.43, with an estimated average price of $120.86. The impact to his portfolio due to this purchase was 0.18%. His holdings were 43,000 shares as of 06/30/2013.
New Purchase: Brookfield Property Partners LP (BPY)
Tom Gayner initiated holdings in Brookfield Property Partners LP. His purchase prices were between $19.57 and $23.64, with an estimated average price of $21.67. The impact to his portfolio due to this purchase was 0.13%. His holdings were 175,122 shares as of 06/30/2013.
New Purchase: ONEOK, Inc. (OKE)
Tom Gayner initiated holdings in ONEOK, Inc.. His purchase prices were between $41.16 and $52.13, with an estimated average price of $46.98. The impact to his portfolio due to this purchase was 0.1%. His holdings were 70,000 shares as of 06/30/2013.
New Purchase: Blackstone Group LP (BX)
Tom Gayner initiated holdings in Blackstone Group LP. His purchase prices were between $19.1 and $23.45, with an estimated average price of $21.2. The impact to his portfolio due to this purchase was 0.09%. His holdings were 116,900 shares as of 06/30/2013.
New Purchase: BlackRock Inc (BLK)
Tom Gayner initiated holdings in BlackRock Inc. His purchase prices were between $245.3 and $291.69, with an estimated average price of $267.9. The impact to his portfolio due to this purchase was 0.08%. His holdings were 9,100 shares as of 06/30/2013.
New Purchase: KKR & Co LP (KKR)
Tom Gayner initiated holdings in KKR & Co LP. His purchase prices were between $17.8 and $21.15, with an estimated average price of $19.85. The impact to his portfolio due to this purchase was 0.08%. His holdings were 115,000 shares as of 06/30/2013.
New Purchase: Eni SpA (E)
Tom Gayner initiated holdings in Eni SpA. His purchase prices were between $40.39 and $48.96, with an estimated average price of $45.85. The impact to his portfolio due to this purchase was 0.04%. His ! holdings were 30,000 shares as of 06/30/2013.
New Purchase: Ross Stores, Inc. (ROST)
Tom Gayner initiated holdings in Ross Stores, Inc.. His purchase prices were between $59.26 and $66.5, with an estimated average price of $64.05. The impact to his portfolio due to this purchase was 0.04%. His holdings were 18,000 shares as of 06/30/2013.
New Purchase: Carlyle Group LP (CG)
Tom Gayner initiated holdings in Carlyle Group LP. His purchase prices were between $24.19 and $32.87, with an estimated average price of $29.56. The impact to his portfolio due to this purchase was 0.02%. His holdings were 20,000 shares as of 06/30/2013.
Sold Out: EOG Resources (EOG)
Tom Gayner sold out his holdings in EOG Resources. His sale prices were between $113.44 and $137.9, with an estimated average price of $128.22.
Sold Out: State Street Corp (STT)
Tom Gayner sold out his holdings in State Street Corp. His sale prices were between $56.51 and $67.44, with an estimated average price of $62.2.
Sold Out: Bunge Ltd (BG)
Tom Gayner sold out his holdings in Bunge Ltd. His sale prices were between $66.4 and $73.51, with an estimated average price of $70.39.
Added: UnitedHealth Group Inc (UNH)
Tom Gayner added to his holdings in UnitedHealth Group Inc by 45.25%. His purchase prices were between $58.54 and $66.09, with an estimated average price of $62.22. The impact to his portfolio due to this purchase was 0.4%. His holdings were 569,800 shares as of 06/30/2013.
Added: Liberty Media Corporation (LMCA)
Tom Gayner added to his holdings in Liberty Media Corporation by 102.38%. His purchase prices were between $108.75 and $130.01, with an estimated average price of $119.32. The impact to his portfolio due to this purchase was 0.2%. His holdings were 85,000 shares as of 06/30/2013.
Added: National Oilwell Varco, Inc. (NOV)
Tom Gayner added to his holdings in National Oilwell Varco, Inc. by 40.44%. His purchase prices were bet! ween $64.! 14 and $71.57, with an estimated average price of $68.35. The impact to his portfolio due to this purchase was 0.14%. His holdings were 191,000 shares as of 06/30/2013.
Added: Google, Inc. (GOOG)
Tom Gayner added to his holdings in Google, Inc. by 86%. His purchase prices were between $765.914 and $915.89, with an estimated average price of $849.25. The impact to his portfolio due to this purchase was 0.13%. His ho
Top 10 Blue Chip Companies To Watch For 2014: International Business Machines Corporation(IBM)
International Business Machines Corporation (IBM) provides information technology (IT) products and services worldwide. Its Global Technology Services segment provides IT infrastructure and business process services, including strategic outsourcing, process, integrated technology, and maintenance services, as well as technology-based support services. The company?s Global Business Services segment offers consulting and systems integration, and application management services. Its Software segment offers middleware and operating systems software, such as WebSphere software to integrate and manage business processes; information management software for database and enterprise content management, information integration, data warehousing, business analytics and intelligence, performance management, and predictive analytics; Tivoli software for identity management, data security, storage management, and datacenter automation; Lotus software for collaboration, messaging, and so cial networking; rational software to support software development for IT and embedded systems; business intelligence software, which provides querying and forecasting tools; SPSS predictive analytics software to predict outcomes and act on that insight; and operating systems software. Its Systems and Technology segment provides computing and storage solutions, including servers, disk and tape storage systems and software, point-of-sale retail systems, and microelectronics. The company?s Global Financing segment provides lease and loan financing to end users and internal clients; commercial financing to dealers and remarketers of IT products; and remanufacturing and remarketing services. It serves financial services, public, industrial, distribution, communications, and general business sectors. The company was formerly known as Computing-Tabulating-Recording Co. and changed its name to International Business Machines Corporation in 1924. IBM was founded in 1910 and is based in Armonk, New York.Advisors' Opinion:
- [By Paul]
IBM. Emerging markets are a big growth driver for this computer systems and software provider. Not only that, Resendes says, IBM has "a bullet-proof balance sheet that will allow it to weather the current storm and position it for superior growth and profitability in the long term." He thinks the stock, which recently traded at $93, is worth $120 a share: ''There are some obvious companies that offer much bigger discounts, but you have to incorporate the safety factor. You're getting a premium company here that's a good spot to be in within the tech space."
- [By Geoff Gannon] Wells Fargo (WFC) ��that only seem cheap if you believe in their franchises. These are far from Ben Graham bargains.
And then other times, Buffett buys companies like Daehan Flour Mills. Or he buys into a liquidation like Comdisco. Or an arbitrage position like Dow Jones.
How does Buffett choose between:
路 A wonderful business at a fair price
路 A fair business at a wonderful price
路 A business that is liquidating
路 An arbitrage opportunity?
Very few successful investors buy stocks that fall into all these categories. Ben Graham did arbitrage, liquidations, and fair businesses at wonderful prices. But he never bought wonderful businesses at fair prices.
Phil Fisher bought wonderful businesses at fair prices. But he never bought fair businesses at wonderful prices, or liquidations, or arbitrage.
Is Buffett just combining Ben Graham and Phil Fisher?
Buffett invested in GEICO ��in fact he put 75% of his net worth into GEICO ��while he was still taking Ben Graham�� class. GEICO is a great example of Warren�� departure from the Ben Graham approach. Buffett was departing from Graham�� approach from the moment he set foot in Graham�� class.
He was focused on his return on investment. He was focused on compounding his wealth. Graham wasn��. Buffett was. That was the difference.
And so Buffett immediately started buying the same stocks as Ben Graham ��but he focused on just the very best ideas in Graham�� portfolio. A great idea for Ben Graham would ��at most ��account for about 10% of his common stock portfolio. A great idea for Warren Buffett could be ��like GEICO was ��75% of his portfolio.
When Buffett started his partnership, he had a 25% position size cap. But he removed that to allow for a 40% investment in American Express (AXP). Buffett made many investments of 10% to 20% of the partnership�� portfolio over the years. For Ben Graham, 10% to 20% was a real! ly big position. It wasn�� the kind of thing you bought every year.
So a huge difference between Ben Graham and Warren Buffett was focus. Buffett was always focused on his best ideas. This is part of what makes Warren Buffett similar to Phil Fisher. And very different from almost all other investors.
The other part of Warren Buffett�� approach that separates him from most investors is that he�� wedded to a very specific idea ��return on investment ��rather than a very specific style of investing.
The only way Buffett can sort through a range of different ideas including good companies, mediocre companies, liquidations, and arbitrage ��is by looking at his return on investment.
I wrote about this back in 2011 in an article entitled: ��arren Buffett: Mid-Continent Tab Card Company.��br>
That article was based on Alice Schroeder�� description of Warren Buffett�� investment in Mid-Continent Tab Card Company.
And it�� a good article to read if you want to know how Warren Buffett thinks about stocks. Because it includes such heretical ideas as: ���growth had the potential to be either an added kicker or the most serious risk to his investment��and ��ou build the margin of safety into each step. You don�� just slap a 40% discount on the intrinsic value estimate you get at the end.��br>
But the most important statement in that article was:
��uffett doesn�� seem to make actual estimates. Alice Schroeder says she never saw anything about future earnings estimates in his files. He didn�� project the future earnings the way stock analysts do.��br>
How is that possible?
How can you sort through a variety of different investment options without using any explicit future estimates?
You have to think in terms of return on investment.
In fact, the reader who asked me the question that prompted the Mid-Continent Tab Card Company article actually got very close to identifying how Warren Buffett thinks about st! ocks:
��ou wrote that Buffett just looked at the initial return (>15%) he was getting and the business�� own ROC. When you aid ��nitial��do you mean the 1st year? I think that sort of makes sense because his return of the subsequent years would be taken (from) the firm�� own ROC and sales growth. Is that how you see it?��br>
Now, what did that reader get wrong? He came very, very close to describing how Buffett looks at a business. But he just missed.
What variable isn�� being considered there?
Is it really true that: ��is return of the subsequent years would be taken (from) the firm�� own ROC and sales growth��
Let�� say a company has zero leverage. And its return on assets has been 10% a year for each of the last 100 years. You can bet on that 10% a year. Okay. Now, let�� say it is growing sales by 10% a year.
How much is the business worth?
And how much should an investor expect to make in that stock if he pays exactly tangible book value?
Can the investor expect to earn 20% a year or 10% a year?
Or something in between?
Now, if you expect to hold the stock for a short-period of time your return will largely be based on what the market is willing to pay for each dollar of earnings the stock has in the future. So, you can certainly make over 100% a year if you buy a stock at 10 times earnings and sell it at 20 times earnings exactly one year from today.
I�� not talking about that. Don�� worry about the resale value right now. Just look at the question of what the owner of a business can expect to make if the following facts are true:
路 Total Assets: $100
路 Annual Earnings: $10
路 Future Annual Sales Growth: 10%
Do you think you can answer that question?
A lot of people think they can answer that question. But Warren Buffett would say you can�� answer that question.
Not until you consider two possible future scenarios. Ten years from today, that same business cou! ld look l! ike:
路 Total Assets: $260
路 Annual Earnings: $26
路 Future Sales Growth: ?
Or it could look like:
路 Total Assets: $100
路 Annual Earnings: $26
路 Future Sales Growth: ?
Or it could look like anything in between. In fact, I�� simplifying. If you look at their 10-year records, quite a few businesses grew assets faster than earnings. So, the range of possible outcomes in terms of the ratio of change in earnings to change in assets is even wider than I just presented.
If we look at two businesses each earning 10% on their assets, each unleveraged, and each growing at 10% a year ��we can imagine one future where assets have grown by $160 over 10 years. And we can imagine another future where assets haven�� grown at all over 10 years.
Which is the better future for an owner?
Obviously, the future with sales growth that far exceeds asset growth.
That would allow the company to buy back stock, pay dividends, etc.
So we can think of the combination of a company�� return on assets and its change in assets and sales as being like the total return on a stock. The total return on a stock includes both price appreciation and dividends.
The total return on a business includes both the return on assets (from this year) and the growth in sales. But it does not include sales growth apart from asset growth. Rather, to the extent that assets and sales grow together ��growth is simply the reinvestment of more assets at the same rate of return.
In other words, a business with a 10% ROA and 0% sales growth and a business with a 10% ROA and 10% sales growth could be more comparable than they appear. If the company with no sales growth pays out 10% of its assets in dividends each year, why is it worth less than the business with a 10% ROA and 10% sales growth?
In the no-growth company, I get 10% of my initial investment returned to me. In the growth company, I get 10% of my initial investment reinv! ested for! me. If the rate of return on that reinvested cash is the same rate of return I can provide for myself on the cash paid out in dividends ��why does it matter which company I choose?
Doesn�� an owner earn the same amount in both businesses?
Now, I think there are qualitative reasons ��basically safety issues ��that would encourage me to prefer the growing business. Usually, companies try to grow. If a company isn�� growing, it could be a sign of something serious.
So a lack of growth is sometimes a symptom of a greater disease. But growth is not always good.
In more cases than people think, growth is actually a pretty neutral consideration in evaluating a stock.
There is an exception. At unusually high rates of growth ��growth is almost universally good. This is a complex issue. But I can simplify it. Very few businesses that grow very fast do so by tying up lots of assets relative to the return they earn on those assets. Therefore, it is unnecessary to insist on high returns on capital when looking at very high growth companies. You��l get the high returns on capital ��at least during the company�� fast growth stage ��whether you ask for them or not.
What do I mean when I say growth is often a pretty neutral consideration?
Let�� use live examples.
Here is Hewlett-Packard (HPQ)��br>
10-Year Average Return on Assets: 3.2%
10-Year Annual Sales Growth: 10.7%
10-Year Annual Asset Growth: 14.5%
And here is Value Line (VALU)��br>
10-Year Average Return on Assets: 76.2%
10-Year Annual Sales Growth: (8.2%)
10-Year Annual Asset Growth: (11.1%)
Whose assets would you pay more for?
I have a problem with an 8% a year decline in sales. And worry that the future looks really, really grim for Value Line.
But it�� hard to say Hewlett-Packard has gained anything through growing these last 10 years. The company has retained a lot of earnings. And it retained those earnings e! ven while! return on assets was low.
The 10-year total return in Value Line shares has been (0.9%) a year over the last 10 years. The 10-year year total return in Hewlett-Packard has been a positive 4% a year.
So it sounds like Hewlett-Packard has done much better. But all of that is attributable to investor perceptions of their industry. If you look at HP�� industry, total returns ��from 2002 to 2012 ��in the stocks of computer makers were around 14% a year. Meanwhile, publishers ��like Value Line ��returned negative one percent a year. So, Value Line�� underperformance relative to Hewlett-Packard is probably better explained by the miserable future prospects for publishers compared to the much more moderate future prospects for computer companies.
Why does this matter in a discussion of Warren Buffett?
Because it illustrates the one future projection I do think Buffett makes. I think he looks out about 10 years and asks himself whether the company�� moat will be intact, its growth prospects will still be decent, etc.
In other words: will this stock deserve to sell at a fairly high P/E ratio 10 years from today?
Warren Buffett doesn�� want to buy a stock that is going to have its P/E ratio contract over 10 years.
To put the risk of P/E ratio contraction in perspective, consider that Value Line traded at over 5 times sales and nearly 25 times earnings just 10 years ago. Whatever the company�� future holds, it�� unlikely we��l see the stock at those kinds of multiples any time soon. Publishers just don�� deserve those kinds of P/E ratios any more.
So, how much the market will value a dollar of earning power at in the future matters. And that is one place where projecting the future is probably part of Buffett�� approach. This is mostly a tool for avoiding certain companies rather than selecting certain companies.
For example, Buffett was willing to buy newspaper stocks in the 1970s but not the 2000s. The reason for that was ! that in t! he 1970s he thought he saw at least a decade of clear sailing for newspapers. In the 2000s, he didn��.
Today, I think Buffett sees at least a decade of clear sailing for the railroads and for IBM. In both cases, his perception of their future prospects was almost certainly the last puzzle piece to fall into place. It wasn�� an issue of IBM (IBM) getting to be cheap enough. It was an issue of Warren Buffett being confident enough to invest in IBM.
By the way, let�� look at IBM�� past record:
10-Year Average Return on Assets: 10.3%
10-Year Annual Sales Growth: 2.8%
10-Year Annual Asset Growth: 1.9%
As you can see, IBM isn�� much of a growth company. But that doesn�� mean the shares can�� be growth shares. IBM has improved margins and bought back stock. That has led to a 20% annual increase in earnings per share compared to just a 3% annual increase in total revenue.
So can we answer the question of why Warren Buffett is interested in companies like IBM and Norfolk Southern (NSC) rather than Hewlett-Packard and Value Line?
Well, Value Line is obviously too small an investment for Buffett. But we��e using it as a stand in for all the publishers Buffett once loved but now shuns.
Buffett is a return on investment investor. He isn�� exactly a growth investor or a value investor ��if by growth we mean total revenue growth and if by value we mean the company�� value as of today.
Buffett wants to compound his money at the fastest rate possible. So he looks at how much of the company�� sales, assets, etc. he is getting. Basically, he looks at a price ratio. And then he looks into the company�� return on its own sales, assets, etc. When you take those two numbers together you get something very close to a rate of return.
The last part you need to consider is the change in assets versus the change in sales (and earnings). Does the company need to grow assets faster than earnings?
Or ��like See�� Candy �! �can it ! grow sales a little faster than assets?
Let�� take a look at Norfolk Southern as a good example of the kind of railroad Buffett would own ��if he didn�� own all of Burlington Northern.
10-Year Average Return on Assets: 4.9%
10-Year Annual Sales Growth: 6.0%
10-Year Annual Asset Growth: 3.6%
Now, how much earning power do you get when you invest in Norfolk Southern?
Total Assets are $28.54 billion. And the market cap is $21.28 billion. So, $28.54 billion / $21.28 billion = $1.34 in assets for every $1 you pay for the stock today.
Now, Norfolk Southern�� return on assets has averaged a little less than 5% over the last decade. But I think that ��like he does with IBM ��Buffett believes the current returns on assets of the railroads are sustainable. So, we are talking something in the 5% to 7% range for a railroad like Norfolk Southern.
On top of this, he sees that the railroads have grown sales faster than assets. Now, we could do an elaborate projection of future margins, returns on assets, etc. to try to figure out what the railroads of the future will look like.
Or, we could just assume that over the last 10 years, Norfolk Southern has grown sales about 2.5% a year faster than it has grown assets. And Norfolk Southern can earn 5% to 7% on its assets. As a result, an investor in Norfolk Southern will see his wealth grow by about 7.5% to 9.5% of the company�� assets he owns. This doesn�� sound like much. But, railroads use leverage. And they often have price-to-book ratios lower than their leverage ratios. As a result, investors can often buy more than $1 in railroad assets for every $1 they spend
- [By Peter Hughes]
International Business Machines (IBM) -- our aggressive pick for the year -- is one of the world's most dominant technology companies, with annual revenues of $105 billion and net income of $16 billion.