I love a good growth company. Good growth businesses are even better when paired with long-tenured managers who own a significant amount of shares while presiding over a great track record of growing earnings and free cash flow and earning high returns on incremental capital. Furthermore, the situation is even better when the current stock quotation undervalues the business. These factors all may be characteristic of Best Buy (BBY) at its current price.
Best Buy announced quarterly earnings today that were 18% lower than the comparable period last year and shares are down nearly 6% on the day. Much of the decline in profits was due to a shift in revenue mix to lower-margin products such as flat-panel TVs, notebook computers, and gaming hardware. So is the selloff in the shares warranted? Are lower margins forever in Best Buy’s future? Those selling off shares today seem to think so.
The main concern swirling around Best Buy seems to be that of a sharp downturn in consumer spending. Though likely to slow a bit, betting against the consumer has not historically been a good gamble. In addition, Best Buy continues to take market share from competitors such as Circuit City (CC), which will help mitigate the pressure on its business in the event of a slowdown in consumer spending. But concerns about consumer spending represent short-term thinking. Investors in common stocks should typically think in longer time horizons. Are the company's competitive advantages intact? Can Best Buy grow while continuing to earn good returns on total capital? Over the longer-term, it seems highly probable that Best Buy can continue to grow and prosper both domestically and internationally. For instance, Best Buy holds a potentially valuable option in its Chinese operation, where it now has just one store.
There is a longer-term risk to profitability: Wal-Mart (WMT). I believe Wal-Mart will continue to be a fierce competitor but probably only on the lower end. Its main advantage is obviously price. Yet Best Buy offers more qualitative advantages: clean stores, great selection, a cool environment, and great service, and often consumers go there first if it’s electronics they crave. The wider selection and more knowledgeable staff (rather than someone who also works in fabrics or grocery) give Best Buy an edge over Wal-Mart in its core customer base for years to come.
As for profitability, for the past ten years returns on total capital have been around 20% on average (due to a modest debt load, returns on average equity have averaged a couple of percentage points higher). The lowest-return years of the past ten were 2001 and 2002 (recessionary conditions) and returns in those years were still quite satisfactory at 17.1% and 17.8%, respectively. Sales have risen 13.7% annually while store base has grown only 12% over this same period. Management stated in today’s press release that new store openings continue to produce 20% returns. These are great numbers and are evidence of a competitive advantage.
The stock currently trades at 15 times forward earnings based on the low end of management’s updated guidance for 2007. This compares with the stock’s average P/E in the 18-20 times range over the past 15+ years. Debt represents about 9% of capital. Management has been buying back shares and increasing the dividend payment steadily since initiating payments in 2003. Chairman Richard Schulze still owns 15% of the company. Even while steadily expanding its store base (the company has ample room to grow) and investing in existing stores, the stock’s free cash flow yield is roughly 5% at today’s price levels. And the company has $2.8B in cash and short-term investments (13% of market value) on the balance sheet. Back out the cash ($5.70/share) from today’s price and the stock trades at 13.5 times forward earnings. Hardly expensive for a business generating such high returns on capital if the returns are sustainable.
At today’s price level (roughly $45/share), taking a small position is likely to yield good long-term returns. Yet the stock doesn’t look cheap enough yet to load up. Unless something has fundamentally impaired the business, if the stock price continues to fall, I may be inclined to provide some liquidity to panic sellers.
Full disclosure: Long shares of Wal-Mart at time of writing.
We discuss a broad range of issues that are often investment-related, but not always so. We call it a 'thought blog'. Sagacious: Having or showing keen discernment, sound judgment, and farsightedness.
Some More WB Wisdom
To paraphrase Warren Buffett:
"Be willing to look foolish as long as you don't feel you have acted foolishly."
"Be willing to look foolish as long as you don't feel you have acted foolishly."
Rumors Swirl Around Countrywide Again
Countrywide Financial (CFC) shares are up over 7% in today’s trading on no apparent news. Is this just speculation or another case of trading ahead of an impending deal announcement? Stories of the latter have been in the financial press in recent days regarding suspicious trading activity surrounding the take-private deal for TXU (TXU) and Rupert Murdoch’s recent buyout offer for Dow Jones (DJ). In fact, a complaint has been filed against a couple that allegedly bought Dow Jones shares just two weeks ahead of the offer announcement.
So is Countrywide a viable takeover target? I’ve argued shares looked cheap in the mid-30s but with the stock advancing nearly 20% since then, the margin of safety in purchase price does not appear to be as great. Yet in the hands of the right buyer Countrywide would be worth quite a bit more than its recent quotation of $41 and change. And if it doesn't get purchased, the company should continue to grow shareholder value - gaining market share in both origination and in servicing (both businesses with scale advantages), as the mortgage market “rationalizes.”
Countrywide is no stranger to buyout speculation. Shares ran up in a similar manner at the end of January on takeover rumors that never materialized. We’ll just have to wait and see if there is any substance to the move this time.
Full disclosure: Long CFC shares.
So is Countrywide a viable takeover target? I’ve argued shares looked cheap in the mid-30s but with the stock advancing nearly 20% since then, the margin of safety in purchase price does not appear to be as great. Yet in the hands of the right buyer Countrywide would be worth quite a bit more than its recent quotation of $41 and change. And if it doesn't get purchased, the company should continue to grow shareholder value - gaining market share in both origination and in servicing (both businesses with scale advantages), as the mortgage market “rationalizes.”
Countrywide is no stranger to buyout speculation. Shares ran up in a similar manner at the end of January on takeover rumors that never materialized. We’ll just have to wait and see if there is any substance to the move this time.
Full disclosure: Long CFC shares.
MSFT-YHOO?
Microsoft (MSFT) to buy Yahoo (YHOO)? I must confess that can’t see an acquisition happening, but I suppose it’s possible. The market seems to believe something will happen, given Yahoo shares are up over 15% today. With Google (GOOG) owning over half the market, and growing at more than double the rate of Yahoo’s and Microsoft’s respective online advertising efforts this past quarter, I believe each needs to take action to become more competitive in this arena.
Larger players (in terms of market share) benefit from the network effects inherent in this space, as Google has shown. The combined MSFT-YHOO entity would control 32% of the worldwide search market, compared with roughly 54% for Google, based on March numbers. So it gets them a little closer to Google’s market share, but still a distant second.
The ability to spread the operational infrastructure across a larger base of users is a powerful force; the broader the network, the more valuable that network becomes. As goes Metcalfe's Law, the value of a network is proportional to the square of the users in that system (i.e. n-squared). Google is the most popular search destination, but also boasts a huge network of third-party sites on which to place ads. Yahoo has the most popular online "portal," but has not been as successful at monetizing its position as has Google. There's not much to say about Microsoft.
That said, the result of combining Microsoft and Yahoo’s online advertising capabilities will be a more robust platform for advertisers, but likely won’t change much for users of their sites. I think an integration of some sort makes strategic sense for both parties. But what makes more sense to me here is a joint venture, not a merger. With a merger, the two companies would have a difficult time integrating the two cultures. Certainly that is one of the strengths of Google – a culture that encourages innovation in this space. Trying to put together two disparate cultures into one company would likely be to the effort's detriment.
This is a situation that certainly bears watching: (formerly?) sworn enemies taking the “lesser of two evils” path to gain some ground on Google. Even if today's speculation comes to fruition, I don't think Google needs to be shaking in its boots just yet.
Full disclosure: Long MSFT.
Larger players (in terms of market share) benefit from the network effects inherent in this space, as Google has shown. The combined MSFT-YHOO entity would control 32% of the worldwide search market, compared with roughly 54% for Google, based on March numbers. So it gets them a little closer to Google’s market share, but still a distant second.
The ability to spread the operational infrastructure across a larger base of users is a powerful force; the broader the network, the more valuable that network becomes. As goes Metcalfe's Law, the value of a network is proportional to the square of the users in that system (i.e. n-squared). Google is the most popular search destination, but also boasts a huge network of third-party sites on which to place ads. Yahoo has the most popular online "portal," but has not been as successful at monetizing its position as has Google. There's not much to say about Microsoft.
That said, the result of combining Microsoft and Yahoo’s online advertising capabilities will be a more robust platform for advertisers, but likely won’t change much for users of their sites. I think an integration of some sort makes strategic sense for both parties. But what makes more sense to me here is a joint venture, not a merger. With a merger, the two companies would have a difficult time integrating the two cultures. Certainly that is one of the strengths of Google – a culture that encourages innovation in this space. Trying to put together two disparate cultures into one company would likely be to the effort's detriment.
This is a situation that certainly bears watching: (formerly?) sworn enemies taking the “lesser of two evils” path to gain some ground on Google. Even if today's speculation comes to fruition, I don't think Google needs to be shaking in its boots just yet.
Full disclosure: Long MSFT.
Another "Milestone" Approaches...
I posted comments when the Dow Jones Industrial Average (DJIA) was reaching new highs last year and so now feel compelled to comment on its recent rise to near 13,000.
The goal of active management is to, on a risk-adjusted basis, beat the return that could be earned by passively investing in a broad-market index fund or ETF. So long-term performance of indexes is relevant for comparison purposes. But over short-periods there is little relevance. Nevertheless, the financial press is hailing this is a “new bull run,” mostly based on an arbitrary number that has little real significance.
Let me start by saying the Dow will reach 13,000. The question is just a matter of when, and it looks like it could be soon. But what does Dow 13,000 mean? Not a whole lot. To me, it means the sum of 30 stock prices divided by 0.12482483 equal 13,000. It’s just a number whose absolute value is really meaningless to an individual’s portfolio, though technical analysts might say it is a “key psychological barrier” or a “technical breakthrough.” And of course CNBC is once again devoting some of its ticker real estate to a new graphic – “Dow is xx.xx points from 13,000 milestone.” I can’t blame them, CNBC is a financial news network and they have to report the financial news. But just because its being reported doesn’t mean it’s important. While we’re on the subject, the S&P 500 is still down 4.3% from its all-time high (1,553.11) set in March of 2000.
What is important is the individual makeup of each investor’s portfolio. Were the individual companies you own purchased at good prices? Are they currently trading at a cheap-to-fair price in relation to their normal earnings power? Do they have a competitive advantage that allows them to control their own destiny? Questions such as these are much more relevant than what an index or average value is doing. This is especially true if there is little overlap between your portfolio and “the Dow.” Day-to-day (even month-to-month) stock price fluctuations can have little to do with fundamentals and more to do with emotional reactions and to changing perceptions of those fundamentals. Over the long-term, as companies earn money and reinvest profitably in their businesses, their stock prices are going to follow. Finding good companies that can be purchased at reasonable prices should treat an investor well over longer time periods.
So what are some aggregate statistics of the broader market as of today? The S&P 500 Index is trading an earnings yield on a forward basis of just over 6.0%, versus a 10-year Treasury yield of 4.7%. Given these numbers, stocks seem relatively attractive to me, but I wouldn't say they're cheap. The S&P over the past year has generated returns on equity in the 18% range. Earnings have grown 15% year-over-year, and on a sustainable growth rate basis can probably grow 12% for the next year, assuming incremental reinvestment rates remain stable. However, analysts have predicted slowing growth – earnings are predicted to grow close to trend (~6%) for this quarter – a prediction that is being exceeded by several companies who have reported earnings thus far.
While buying “the market” at current levels is likely to result in reasonable but not spectacular returns, an investor’s best bet, as usual, is to find companies trading at more attractive valuations than the market as a whole. Pay attention to your “basket” of stocks, not those of “the market.” Find stocks with low debt and growing free cash flow that are returning cash to shareholders and generating solid returns on capital over a full economic cycle.
Where to look? The worst performing sector in the S&P 500 this year is “Financials,” up just 0.85% compared with the Index return of 5.21%, with an overall sector P/E of less than 15 and an above-market dividend yield of 2.5%. On an individual company basis, many stocks here are likely to be relatively more attractive, with a few yielding 4-5% along with solid growth prospects.
The goal of active management is to, on a risk-adjusted basis, beat the return that could be earned by passively investing in a broad-market index fund or ETF. So long-term performance of indexes is relevant for comparison purposes. But over short-periods there is little relevance. Nevertheless, the financial press is hailing this is a “new bull run,” mostly based on an arbitrary number that has little real significance.
Let me start by saying the Dow will reach 13,000. The question is just a matter of when, and it looks like it could be soon. But what does Dow 13,000 mean? Not a whole lot. To me, it means the sum of 30 stock prices divided by 0.12482483 equal 13,000. It’s just a number whose absolute value is really meaningless to an individual’s portfolio, though technical analysts might say it is a “key psychological barrier” or a “technical breakthrough.” And of course CNBC is once again devoting some of its ticker real estate to a new graphic – “Dow is xx.xx points from 13,000 milestone.” I can’t blame them, CNBC is a financial news network and they have to report the financial news. But just because its being reported doesn’t mean it’s important. While we’re on the subject, the S&P 500 is still down 4.3% from its all-time high (1,553.11) set in March of 2000.
What is important is the individual makeup of each investor’s portfolio. Were the individual companies you own purchased at good prices? Are they currently trading at a cheap-to-fair price in relation to their normal earnings power? Do they have a competitive advantage that allows them to control their own destiny? Questions such as these are much more relevant than what an index or average value is doing. This is especially true if there is little overlap between your portfolio and “the Dow.” Day-to-day (even month-to-month) stock price fluctuations can have little to do with fundamentals and more to do with emotional reactions and to changing perceptions of those fundamentals. Over the long-term, as companies earn money and reinvest profitably in their businesses, their stock prices are going to follow. Finding good companies that can be purchased at reasonable prices should treat an investor well over longer time periods.
So what are some aggregate statistics of the broader market as of today? The S&P 500 Index is trading an earnings yield on a forward basis of just over 6.0%, versus a 10-year Treasury yield of 4.7%. Given these numbers, stocks seem relatively attractive to me, but I wouldn't say they're cheap. The S&P over the past year has generated returns on equity in the 18% range. Earnings have grown 15% year-over-year, and on a sustainable growth rate basis can probably grow 12% for the next year, assuming incremental reinvestment rates remain stable. However, analysts have predicted slowing growth – earnings are predicted to grow close to trend (~6%) for this quarter – a prediction that is being exceeded by several companies who have reported earnings thus far.
While buying “the market” at current levels is likely to result in reasonable but not spectacular returns, an investor’s best bet, as usual, is to find companies trading at more attractive valuations than the market as a whole. Pay attention to your “basket” of stocks, not those of “the market.” Find stocks with low debt and growing free cash flow that are returning cash to shareholders and generating solid returns on capital over a full economic cycle.
Where to look? The worst performing sector in the S&P 500 this year is “Financials,” up just 0.85% compared with the Index return of 5.21%, with an overall sector P/E of less than 15 and an above-market dividend yield of 2.5%. On an individual company basis, many stocks here are likely to be relatively more attractive, with a few yielding 4-5% along with solid growth prospects.
Another Warren Quote
“What counts for most people in investing is not how much they know, but rather how realistically they define what they don't know. An investor needs to do very few things right as long as he or she avoids big mistakes.”
- Warren Buffett
Importance of Good Business Economics
"When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is usually the reputation of the business that remains intact."
- Warren Buffett
- Warren Buffett
Subprime Mortgage Fears Bring Select Opportunities
Yet another analyst downgraded Countrywide Financial (CFC) today. And the shares are down another 3% on top of being down almost 15% year-to-date. In my view, the decline on the news provides yet another great entry point for long-term investors. Don’t get me wrong, this will be a volatile sector to be exposed to in the near term, but an investment case here need not be predicated on a quick rebound in loan originations.
Despite market perceptions of CFC as a pure play on mortgages, less than half of Countrywide’s earnings are derived from originations. The company is the second-largest loan servicer in the country (after Wells Fargo), with a servicing portfolio of $1.33 trillion, up 17% year over year through February. The servicing fees and interest earned on no-cost escrow accounts in this business give it annuity-like characteristics that are not tied directly to originations. The company’s fast-growing banking division, with $84B in assets, has grown 12% since last year and now provides about one third of CFC's profits. The insurance and capital markets segments further diversify the business.
At $35, Countrywide trades at 8 times forward earnings, 1.4 times book value, and pays a 1.7% dividend. Management has an enviable track record of growing value for shareholders – over the past 15 years the stock has returned over 18% per annum including its recent poor performance. Based on conservative assumptions, I think the company is likely to have one or two years of flat revenues followed by continued growth as the industry recovers. Countrywide’s origination business will not suffer as greatly as the industry since it continues to take market share. And its financial strength and diversified revenue base give it many options as the industry shakes out the weakest players.
Is the market discounting overly pessimistic views disproportionate with their probability of occurrence? It sure looks that way. As an investor with a long-term perspective, I welcome the misvaluation as an opportunity to add to positions. The stock can still go lower, but the risk-reward balance seems tilted in favor of the patient investor. Outperformance over long periods requires being able to stomach bad news and volatility in the short-term. Once the mortgage industry dust settles, shares will make up for lost time.
I’m not oblivious to the near-term threats to the business. Countrywide has originated many option-ARMs, which are a relatively new product whose long-term viability has not been proven. Exposure to the nonprime market remains a concern, but Countrywide has not been a large player in this space. The company securitizes and sells nearly all of the loans it originates, so an investment in Countrywide carries low balance sheet risk. Though the company holds some residual tranches from CMOs it sells, these comprise only a small portion of company assets.
In aggregate, the potential rewards seem to outweigh the risks. While negative industry sentiment is justified with players such as New Century Financial (NEW), Countrywide’s year-to-date loss has just made its shares more attractive, in my view.
Full disclosure: Long CFC shares personally as well as for clients.
Buffett’s Successor Will Be A Lot Like Him
In his most recent shareholder letter, posted one week ago, Warren Buffett shed more light on Berkshire Hathaway's (BRK.A, BRK.B) CEO succession plan. It sounds like they’re in pretty good shape for the CEO role, but that they’re going to have more difficulty finding a chief investment officer who can take over. Buffett has long said the board will split his current position into two (CEO, CIO) upon his death.
So who will it be? My guess is that it will be someone very much like Buffett himself: A self-effacing, modest person who avoids the limelight, doesn’t go on the speaking circuit, and doesn’t attend black-tie events. It’s likely to be someone happy to be paid well, but not extravagantly, for doing what he or she loves (it's fair to say the person could be the highest paid in Omaha, however).
It'll be a family-oriented person who would not enjoy the fast-paced lifestyle of an East Coast hedge fund manager. This person will be more likely to be out coaching his or her kids’ sports teams rather than hobnobbing with other executives. It is this independence that likely has helped and will continue to help this person make superb investment judgments, I’m betting. Because of the trust Buffett will be placing in this person, his or her views and opinions will be deeply respected and closely watched.
The investment officer selection process at Berkshire is going to be fun to watch over the next several years.
Full disclosure: I own shares for clients as well as personally.
So who will it be? My guess is that it will be someone very much like Buffett himself: A self-effacing, modest person who avoids the limelight, doesn’t go on the speaking circuit, and doesn’t attend black-tie events. It’s likely to be someone happy to be paid well, but not extravagantly, for doing what he or she loves (it's fair to say the person could be the highest paid in Omaha, however).
It'll be a family-oriented person who would not enjoy the fast-paced lifestyle of an East Coast hedge fund manager. This person will be more likely to be out coaching his or her kids’ sports teams rather than hobnobbing with other executives. It is this independence that likely has helped and will continue to help this person make superb investment judgments, I’m betting. Because of the trust Buffett will be placing in this person, his or her views and opinions will be deeply respected and closely watched.
The investment officer selection process at Berkshire is going to be fun to watch over the next several years.
Full disclosure: I own shares for clients as well as personally.
What Rate of Return Is the Market Implying?
Market pundits on CNBC continue to talk about the market being overbought at these levels and mentioning the likelihood that there could be a better entry point at which to put new cash to work. I tend to agree, as I look at market volatility at a nearly 20-year low (similar to this time last year) that is due to “revert to the mean.” So the market may be overbought and participants in general complacent about market risk, but is the stock market overvalued?
It’s hard to answer that question, of course, and I don’t know for certain. Various market participants use different methods to come up with the rate at which to discount the stock market’s future growth. And all have different returns they are willing to accept for the risk they take in equities. That's not finance theory, but it's the way I see it. I, for one, am always in a better mood when the markets are down and thus the implied future rate of return up.
Based on current S&P 500 Index levels, I calculate the implied future return on the market to be a little under 8.0% based on a long-term trend growth rate of 6%. This tells me that indexing from this level is likely to yield below-average future returns. So is the market overvalued? Well, are you willing to accept the added risk inherent in stocks for about 3% more than a 10-year Treasury? That's really the long-term Treasury rate plus inflation. I see that as being fairly valued to slightly overvalued.
It’s hard to answer that question, of course, and I don’t know for certain. Various market participants use different methods to come up with the rate at which to discount the stock market’s future growth. And all have different returns they are willing to accept for the risk they take in equities. That's not finance theory, but it's the way I see it. I, for one, am always in a better mood when the markets are down and thus the implied future rate of return up.
Based on current S&P 500 Index levels, I calculate the implied future return on the market to be a little under 8.0% based on a long-term trend growth rate of 6%. This tells me that indexing from this level is likely to yield below-average future returns. So is the market overvalued? Well, are you willing to accept the added risk inherent in stocks for about 3% more than a 10-year Treasury? That's really the long-term Treasury rate plus inflation. I see that as being fairly valued to slightly overvalued.
Opportunities in Ethanol?
Over the past year, ethanol has become a buzzword that has attracted much media attention and debate. Environmentalists like it because it burns cleaner (I would counter that you get 20-30% less mileage from ethanol than ordinary gasoline). Politicians love it because it is “alternative energy,” a phrase that is sure to garner some good publicity and public support as they look for ways to curb our “addiction to oil.”
Producers love it, since domestic producers are generally protected from foreign producers (such as Brazil) by a $0.54 tariff on imported ethanol that has now been extended to January 2009. Largely because of a 51 cent-per-gallon tax break, ethanol has received about 50 cents more per gallon than gasoline at the wholesale level (right now it’s about $0.45 more).
Who also loves ethanol? Corn growers. That’s right, because corn prices were up over 80% last year and have stabilized at over $4 a bushel. This is a boon for farmers. Lots of them can do well at around $2/bushel…
Let’s do some quick math. A bushel of corn yields 2.8 gallons of ethanol. This amounts to $1.45 per gallon in the cost of corn alone! If this were the business’s only cost, it could still be pretty profitable, but ethanol production is very capital-intensive. They need get the corn to the plant, process the corn and separate byproducts, refine the corn into ethanol (using mostly natural gas), then ship it to the destination, which is done not by pipeline but by rail car. So the producers are captive to suppliers and at the mercy of shipping companies - trains - who are their only viable option.
And they have no control over the selling price of the finished product. Of course, they can use futures contracts and OTC swap transactions to lock in prices and smooth revenues. But the producer itself has no influence on prices. They can’t simply make a “better” ethanol than someone else, no matter what marketing says. As of today, the March ethanol contract on the CBOT was going for $2.00 per gallon. The so-called “crush spread” is about $1.25 at the moment (crush spread = ethanol price times 2.80 minus the price of corn per bushel). So the gross margin on corn is approximately 31%. Not bad. But that’s just the cost of goods sold. Consider all the SG&A and interest expenses these plants have to cover, that $1.25 per bushel can get used up rather quickly.
Anyone downstream of corn production does not so much like ethanol, because it has increased costs substantially. Ethanol demand currently accounts for about 20% of corn production. New plants are coming online soon and will boost that demand significantly – and production is looking to double by 2008 if planned construction takes place. This does not bode well for producers, as corn prices are likely to stay high. On the supply side, farmers can grow on additional acres and convert from existing crops to corn. But the supply of land is limited. Maybe they shouldn’t have sold so much land to developers – corn is now where the money is!
Several of these new plants are likely to be ill-conceived - a response to favorable market conditions this past summer. I recently reviewed a prospectus and projected financials for a new biodiesel plant that it proposed to go up here in Iowa. They’re projecting $2.35 per gallon on the top line for biodiesel to make this work! These projections were prepared in August, when gasoline prices at the pump were over $3.00! I question the assumption that with diesel pump prices to consumers right around $2.50 that they'll get wholesale rates that high. And the soy oil they're using as an input costs over $2.20 per gallon right now. Biodiesel is a bit different than ethanol in that there is the same amount of energy in 0.88 gallons of biodiesel compared to a gallon of gasoline and gets a higher tax break. So it actually trades at a slight premium. But making it work with soy oil alone priced above the wholesale price of diesel is a pipe dream.
I typically don’t like purely commodity industries where there are no bargaining powers with suppliers, and who have no pricing power whatsoever. If this were a business not protected by tariffs and tax breaks, it would not exist. But those tax breaks and tariffs are more likely than not to continue, because of the support of politicians from both sides of the aisle.
Given all the press about alternative energy, you might think ethanol companies would be doing quite well. Yet publicly traded ethanol pure-plays such as VeriSun (VSE) seem to reflect declining sentiments about industry prospects. The most difficult questions to answer are also those that are fundamental to an investment decision in this industry - (1) what will gasoline prices do and (2) where will corn prices be? Frankly, I can't answer either with conviction. But given increasing demand for corn, a crop that has little ability to expand significantly in supply, and increasing capacity coming on line for ethanol production, more likely than not the returns to this industry will fall and the most efficient producers will win out.
Producers love it, since domestic producers are generally protected from foreign producers (such as Brazil) by a $0.54 tariff on imported ethanol that has now been extended to January 2009. Largely because of a 51 cent-per-gallon tax break, ethanol has received about 50 cents more per gallon than gasoline at the wholesale level (right now it’s about $0.45 more).
Who also loves ethanol? Corn growers. That’s right, because corn prices were up over 80% last year and have stabilized at over $4 a bushel. This is a boon for farmers. Lots of them can do well at around $2/bushel…
Let’s do some quick math. A bushel of corn yields 2.8 gallons of ethanol. This amounts to $1.45 per gallon in the cost of corn alone! If this were the business’s only cost, it could still be pretty profitable, but ethanol production is very capital-intensive. They need get the corn to the plant, process the corn and separate byproducts, refine the corn into ethanol (using mostly natural gas), then ship it to the destination, which is done not by pipeline but by rail car. So the producers are captive to suppliers and at the mercy of shipping companies - trains - who are their only viable option.
And they have no control over the selling price of the finished product. Of course, they can use futures contracts and OTC swap transactions to lock in prices and smooth revenues. But the producer itself has no influence on prices. They can’t simply make a “better” ethanol than someone else, no matter what marketing says. As of today, the March ethanol contract on the CBOT was going for $2.00 per gallon. The so-called “crush spread” is about $1.25 at the moment (crush spread = ethanol price times 2.80 minus the price of corn per bushel). So the gross margin on corn is approximately 31%. Not bad. But that’s just the cost of goods sold. Consider all the SG&A and interest expenses these plants have to cover, that $1.25 per bushel can get used up rather quickly.
Anyone downstream of corn production does not so much like ethanol, because it has increased costs substantially. Ethanol demand currently accounts for about 20% of corn production. New plants are coming online soon and will boost that demand significantly – and production is looking to double by 2008 if planned construction takes place. This does not bode well for producers, as corn prices are likely to stay high. On the supply side, farmers can grow on additional acres and convert from existing crops to corn. But the supply of land is limited. Maybe they shouldn’t have sold so much land to developers – corn is now where the money is!
Several of these new plants are likely to be ill-conceived - a response to favorable market conditions this past summer. I recently reviewed a prospectus and projected financials for a new biodiesel plant that it proposed to go up here in Iowa. They’re projecting $2.35 per gallon on the top line for biodiesel to make this work! These projections were prepared in August, when gasoline prices at the pump were over $3.00! I question the assumption that with diesel pump prices to consumers right around $2.50 that they'll get wholesale rates that high. And the soy oil they're using as an input costs over $2.20 per gallon right now. Biodiesel is a bit different than ethanol in that there is the same amount of energy in 0.88 gallons of biodiesel compared to a gallon of gasoline and gets a higher tax break. So it actually trades at a slight premium. But making it work with soy oil alone priced above the wholesale price of diesel is a pipe dream.
I typically don’t like purely commodity industries where there are no bargaining powers with suppliers, and who have no pricing power whatsoever. If this were a business not protected by tariffs and tax breaks, it would not exist. But those tax breaks and tariffs are more likely than not to continue, because of the support of politicians from both sides of the aisle.
Given all the press about alternative energy, you might think ethanol companies would be doing quite well. Yet publicly traded ethanol pure-plays such as VeriSun (VSE) seem to reflect declining sentiments about industry prospects. The most difficult questions to answer are also those that are fundamental to an investment decision in this industry - (1) what will gasoline prices do and (2) where will corn prices be? Frankly, I can't answer either with conviction. But given increasing demand for corn, a crop that has little ability to expand significantly in supply, and increasing capacity coming on line for ethanol production, more likely than not the returns to this industry will fall and the most efficient producers will win out.
Watsco Continues to Expand
Watsco, Inc. (WSO) continued to roll on its growth path this past year, growing earning per share by 17% while expanding operating margins and gross profit margins year-over-year.
This is a boring business, but a profitable one. Watsco distributes air conditioning, heating, and refrigeration equipment and related parts and supplies. The company is still small and operates in an industry where demographic trends are favorable for continued growth as the industry consolidates. The market is highly fragmented, with over 1,300 companies in the space. The company’s goal is to build out a national network and broaden its product offerings. In this industry, larger players will benefit from economies of scale in purchasing from a concentrated group of manufacturers, and the ability to spread higher revenues over a large fixed cost base – in distribution and store location infrastructure. Watsco is the largest player in the industry, yet commanded only 7.4% of the $26 billion U.S. HVAC market at the end of 2006.
Watsco is controlled by its CEO, Al Nahmad, so while interests of existing shareholders are not aligned directly with shareholders, you can believe he’s looking out for the company’s interest given the amount of net worth he’s got tied up. From a management perspective, I like that they don’t need to worry about dissident shareholders trying to take this thing over. Private equity loves highly profitable companies operating in niche markets with very little debt. All things considered, I’d say the control issue is a good thing for outside shareholders at the moment, because this business is protected from takeovers that should allow it to continue on its growth path.
The risks here relate to the economic cycle. Its products are durables that will be effected by a downturn in economic activity. However, 75% of the company’s revenues are derived from the service and replacement market, which is less cyclical. People still want their homes cool when they don’t have a job.
At current prices, Watsco appears fairly priced, trading at about 17 times forward earnings with a 1.8% dividend yield. For a projected growth rate of around 20% for the next several years, this doesn’t seem overvalued, either. If the stock pulls back to the mid-40s, as it did this past summer and again in late December, I’d think seriously about adding to positions.
Full disclosure: Clients own shares in WSO.
This is a boring business, but a profitable one. Watsco distributes air conditioning, heating, and refrigeration equipment and related parts and supplies. The company is still small and operates in an industry where demographic trends are favorable for continued growth as the industry consolidates. The market is highly fragmented, with over 1,300 companies in the space. The company’s goal is to build out a national network and broaden its product offerings. In this industry, larger players will benefit from economies of scale in purchasing from a concentrated group of manufacturers, and the ability to spread higher revenues over a large fixed cost base – in distribution and store location infrastructure. Watsco is the largest player in the industry, yet commanded only 7.4% of the $26 billion U.S. HVAC market at the end of 2006.
Watsco is controlled by its CEO, Al Nahmad, so while interests of existing shareholders are not aligned directly with shareholders, you can believe he’s looking out for the company’s interest given the amount of net worth he’s got tied up. From a management perspective, I like that they don’t need to worry about dissident shareholders trying to take this thing over. Private equity loves highly profitable companies operating in niche markets with very little debt. All things considered, I’d say the control issue is a good thing for outside shareholders at the moment, because this business is protected from takeovers that should allow it to continue on its growth path.
The risks here relate to the economic cycle. Its products are durables that will be effected by a downturn in economic activity. However, 75% of the company’s revenues are derived from the service and replacement market, which is less cyclical. People still want their homes cool when they don’t have a job.
At current prices, Watsco appears fairly priced, trading at about 17 times forward earnings with a 1.8% dividend yield. For a projected growth rate of around 20% for the next several years, this doesn’t seem overvalued, either. If the stock pulls back to the mid-40s, as it did this past summer and again in late December, I’d think seriously about adding to positions.
Full disclosure: Clients own shares in WSO.
Money Market Redemptions Hit 2 1/2 Year High
Let's take a look at recent fund flow data once again. According to AMG Data Services, for the week ended January 31st, "Money Market funds reported net cash outflows totaling -$35.720 billion, the largest outflow from the sector since 6/30/04 and fewer funds reported inflows (678) than any week since 6/29/05 as more funds reported net redemptions than any week since 4/27/05.”
To put these outflows into perspective, the last time the outflows were that large (6/30/04) the S&P 500 Index was down about 3% over the next 30 days.
To put these outflows into perspective, the last time the outflows were that large (6/30/04) the S&P 500 Index was down about 3% over the next 30 days.
2007: A Look Forward
Here we are going into another new year. Seems amazing that another year has passed us by. At each yearly crest I realized how quickly time really does go.
I will quit waxing philosophical to deal with what I look for in the stock market in the year ahead. What will the market do and what companies or sectors might do well in 2007?
I must qualify my forthcoming statements by saying that I don’t think broad market predictions are worthwhile. If I get any of this right, it will have been from dumb luck and not clairvoyance. Putting one’s thoughts down on paper (or blogs), though, allows a person to reflect on past statements and determine what was right or wrong about an analysis. It’s useful to document one’s investment thesis or underlying assumptions when making investment decisions or developing projections. To do so allows one to more readily learn from past mistakes and to develop better analytical processes to hopefully avoid similar mistakes going forward.
The contrarian in me likes to look at companies that have been beaten down in the current year to find future winners. As I look at the Dow 30, I see five companies that haven’t really moved much this year. 3M (MMM) and Alcoa (AA) were basically flat; Wal-Mart (WMT) is down 2.9%; Home Depot (HD) is down 4%; and Intel (INTC) has been the biggest loser, down 19%. The worst performing sectors in the S&P 500 Index were information technology, health care, and consumer staples, though they are all higher.
Let’s start with next year’s winners. In this year’s discard pile, there are two I like – Wal-Mart and Home Depot. Each company is a past stock market darling whose stock has fallen on hard times. Both trade at a valuation that discounts overly pessimistic views yet these two companies are still growing well, enjoying high returns on capital, growing dividends, and share buybacks. I expect these two companies to benefit the long-term investor if purchased at these levels, though I will not give a timetable on when they will rally.
In the coming year, I suspect that the domestic stock market will do the better than most developed international markets. Emerging markets may continue to do well, as there remains an abundance of capital in search of investments. This depends on lot on how the prices of basic commodities hold up, as they are the dominant source of emerging market exports. U.S. investors in international markets in 2007 may face a headwind in the form of a rising dollar, which lies in contrast to this year. As of today, the MSCI EAFE Index is up 22.3% year-to-date in dollar terms, but in local currency it’s up only 12.7%. So nearly 10% of its 2006 return has been due to the declining dollar.
The dollar has been trampled this year and it seems all of the talk I hear about it is bearish. So I’ll take the opposite view and say the dollar will be up in 2007. A wild card is whether the Chinese will allow their currency (yuan) to float. If so, this would help reduce our trade deficit, which is bullish for the dollar. In addition to the dollar tailwind (for U.S. companies), financially strong large and medium sized companies stand to benefit the most if credit markets tighten significantly and world economic growth slows.
I think we could have another up year in the market, probably in the range of 8-12%. But I don’t think we can get this upside with the low volatility we’ve had since August. I think we’re going to be able to buy the market at lower levels, which obviously increases the upside for an investor buying on dips. That said, I don’t advocate trying to time the market. I for one am no good at it. I DO advocate paying close attention to the prices paid when investing in individual companies. If the market is not offering you a margin of safety, money markets pay you nearly 5% to sit on the sidelines.
I don’t see a lot of talk about P/E multiple expansion for next year. In fact, I hear many pundits on CNBC saying “we don’t see much multiple expansion in 2007.” This leads me to believe we will have some, but I think this will help to cushion returns, because earnings growth will not be as robust as expected. Multiples may expand as earnings grow moderately. A 15.5 forward P/E only has to move to 16.28 to add another 5% to the market's total return.
The consumer is likely to remain strong in 2007. There is no reason to believe otherwise or to bet against them. Yes, the savings rate is flat-to-negative and home equity extraction has slowed significantly. But workers in general have not shared commensurately in the prosperity corporations have enjoyed recently and labor markets are tightening, leading me to conclude that wage levels will continue to ratchet higher and provide additional discretionary income.
Of course, discretionary income depends a lot on what energy prices do. Higher oil, natural gas, and gasoline prices leave less discretionary spending for the consumer. So where will prices go in 2007? Well, the low supply/growing demand argument continues to have merit. I’m not sure where the “normal” prices for oil and gas are, but under normal circumstances prices should approximate the marginal cost of production. The marginal cost of production is probably in the $20-40 dollar range (yes, it’s a wide range because its difficult to know for certain). The marginal cost is probably on the higher end due to higher drilling costs and a tight labor supply that have left the industry with higher incremental production costs. The prospect of serious supply disruptions keeps a premium on oil prices that I don’t think with abate soon.
It will be interesting to see how it plays out. Happy New Year.
I will quit waxing philosophical to deal with what I look for in the stock market in the year ahead. What will the market do and what companies or sectors might do well in 2007?
I must qualify my forthcoming statements by saying that I don’t think broad market predictions are worthwhile. If I get any of this right, it will have been from dumb luck and not clairvoyance. Putting one’s thoughts down on paper (or blogs), though, allows a person to reflect on past statements and determine what was right or wrong about an analysis. It’s useful to document one’s investment thesis or underlying assumptions when making investment decisions or developing projections. To do so allows one to more readily learn from past mistakes and to develop better analytical processes to hopefully avoid similar mistakes going forward.
The contrarian in me likes to look at companies that have been beaten down in the current year to find future winners. As I look at the Dow 30, I see five companies that haven’t really moved much this year. 3M (MMM) and Alcoa (AA) were basically flat; Wal-Mart (WMT) is down 2.9%; Home Depot (HD) is down 4%; and Intel (INTC) has been the biggest loser, down 19%. The worst performing sectors in the S&P 500 Index were information technology, health care, and consumer staples, though they are all higher.
Let’s start with next year’s winners. In this year’s discard pile, there are two I like – Wal-Mart and Home Depot. Each company is a past stock market darling whose stock has fallen on hard times. Both trade at a valuation that discounts overly pessimistic views yet these two companies are still growing well, enjoying high returns on capital, growing dividends, and share buybacks. I expect these two companies to benefit the long-term investor if purchased at these levels, though I will not give a timetable on when they will rally.
In the coming year, I suspect that the domestic stock market will do the better than most developed international markets. Emerging markets may continue to do well, as there remains an abundance of capital in search of investments. This depends on lot on how the prices of basic commodities hold up, as they are the dominant source of emerging market exports. U.S. investors in international markets in 2007 may face a headwind in the form of a rising dollar, which lies in contrast to this year. As of today, the MSCI EAFE Index is up 22.3% year-to-date in dollar terms, but in local currency it’s up only 12.7%. So nearly 10% of its 2006 return has been due to the declining dollar.
The dollar has been trampled this year and it seems all of the talk I hear about it is bearish. So I’ll take the opposite view and say the dollar will be up in 2007. A wild card is whether the Chinese will allow their currency (yuan) to float. If so, this would help reduce our trade deficit, which is bullish for the dollar. In addition to the dollar tailwind (for U.S. companies), financially strong large and medium sized companies stand to benefit the most if credit markets tighten significantly and world economic growth slows.
I think we could have another up year in the market, probably in the range of 8-12%. But I don’t think we can get this upside with the low volatility we’ve had since August. I think we’re going to be able to buy the market at lower levels, which obviously increases the upside for an investor buying on dips. That said, I don’t advocate trying to time the market. I for one am no good at it. I DO advocate paying close attention to the prices paid when investing in individual companies. If the market is not offering you a margin of safety, money markets pay you nearly 5% to sit on the sidelines.
I don’t see a lot of talk about P/E multiple expansion for next year. In fact, I hear many pundits on CNBC saying “we don’t see much multiple expansion in 2007.” This leads me to believe we will have some, but I think this will help to cushion returns, because earnings growth will not be as robust as expected. Multiples may expand as earnings grow moderately. A 15.5 forward P/E only has to move to 16.28 to add another 5% to the market's total return.
The consumer is likely to remain strong in 2007. There is no reason to believe otherwise or to bet against them. Yes, the savings rate is flat-to-negative and home equity extraction has slowed significantly. But workers in general have not shared commensurately in the prosperity corporations have enjoyed recently and labor markets are tightening, leading me to conclude that wage levels will continue to ratchet higher and provide additional discretionary income.
Of course, discretionary income depends a lot on what energy prices do. Higher oil, natural gas, and gasoline prices leave less discretionary spending for the consumer. So where will prices go in 2007? Well, the low supply/growing demand argument continues to have merit. I’m not sure where the “normal” prices for oil and gas are, but under normal circumstances prices should approximate the marginal cost of production. The marginal cost of production is probably in the $20-40 dollar range (yes, it’s a wide range because its difficult to know for certain). The marginal cost is probably on the higher end due to higher drilling costs and a tight labor supply that have left the industry with higher incremental production costs. The prospect of serious supply disruptions keeps a premium on oil prices that I don’t think with abate soon.
It will be interesting to see how it plays out. Happy New Year.
Christmas Weekend Wisdom
"It is not necessary to do extraordinary things to get extraordinary results. "
- Warren Buffett
- Warren Buffett
Generic Approved For Key Biovail Drug
As mentioned in recent posts, Biovail (BVF) is in the process of restructuring itself on the eve of the introduction of generic competition to its key product. The company’s worst fears were realized when Thursday afternoon a decision was made to allow generic Wellbutrin XL, which is 41% of Biovail’s sales, on the market. The company was expecting this generic competition to come to market January 1st, so now its just going to come a little earlier than expected. This eliminates for investors the possibility of earnings surprises in the event the generic was not approved by that date.
Make no mistake; this is a big setback for the company, but one that the market was clearly expecting, judging by today’s mere 2.3% share price retreat in reaction to the news. The company is dealing with this – reducing their fixed cost based by eliminating their U.S. workforce and buying in all of their debt. While the share price has come up quite a bit to reflect renewed confidence in the company’s future, at current levels there doesn’t seem to be a margin of safety in the shares. This makes me wary of new investments at this point. But with expected dividends totaling $2.00 in 2007, the total return assuming no share price movement is a little under 10%, a satisfactory return until new products again boost Biovail’s revenues and reinvigorate growth.
Make no mistake; this is a big setback for the company, but one that the market was clearly expecting, judging by today’s mere 2.3% share price retreat in reaction to the news. The company is dealing with this – reducing their fixed cost based by eliminating their U.S. workforce and buying in all of their debt. While the share price has come up quite a bit to reflect renewed confidence in the company’s future, at current levels there doesn’t seem to be a margin of safety in the shares. This makes me wary of new investments at this point. But with expected dividends totaling $2.00 in 2007, the total return assuming no share price movement is a little under 10%, a satisfactory return until new products again boost Biovail’s revenues and reinvigorate growth.
Biovail Slims Down
Biovail’s (BVF) share price has risen substantially over the past couple weeks as good things are happening to the company. Yesterday, the company announced that it is shifting its strategy – cutting its U.S. sales staff (opting instead to contract with existing distributors), boosting R&D spending, buying in all of its long-term debt, tripling its current annual dividend, and paying a special dividend. The company also issued guidance for 2007 that was above expectations. The company’s own projections now assume that generic competition for Wellbutrin XL (41% of sales) will come online January 1st. Management is finally facing reality by factoring this early date into its projections.
These actions raise some questions. One problem that stuck out to me is that they’re forecasting roughly $2.00 in operating cash flow for 2007, which happens to be the exact amount they’re going to be paying out in dividends over the next 12 months - or rather, "contemplating" paying that amount, according to the press release.
They’ve got more than enough cash ($630M) to buy in their existing long-term debt ($400M). Doing this will reduce interest expense (and add to cash flow) about $.30 per share. But they’ll also need more cash for ramped-up R&D spending and severance related to the layoffs of its U.S. salesforce (12% of the total workforce). They’re going to be spending about $125M (roughly $0.75/share) each year over the next four years for R&D. And they’ll book restructuring charges related to the layoffs in the fourth quarter, but the cash outflows related to this will not be confined to one period.
All things considered, unless they get a significant new product on the market, I think they’re going to need more cash than they’re currently generating to maintain their announced goals for a length of time. The $1.50 annual dividend plus $0.50 special dividend totals $2.00 per share. With projected operating cash flows of $2.00-$2.12 per share and an additional $0.30 in interest savings, I get to only around $2.40 in annual operating cash flow on the high end (my hunch is that guidance already factors in the interest savings). They’ll save on compensation costs in future periods, but near-term severance costs will use cash. Paying out more than the cash flow they generate should work this year with no problem, because they’ll have quite a bit of cash left over after buying in debt. But if capital expenditures are higher than expected, current products do not perform as projected or those in the pipeline don’t take off, they may have to increase short-term borrowing or cut back their dividend plans in another year or so.
This recent action makes me think that management is preparing for something on the horizon – like a private equity deal or acquisition. Why else would you elect to become debt free and start paying nearly all operating cash flow as a dividend? Does the founder/chairman/largest individual shareholder want to exploit the low price and take the company private for himself? If he wanted that, he’d be more likely to use the extra cash allocated for dividends to reduce the outstanding share count. It seems to me the founder wants to get the cash off the balance sheet in the event a buyer emerges to buy the whole company at a price he considers undervalued.
These actions raise some questions. One problem that stuck out to me is that they’re forecasting roughly $2.00 in operating cash flow for 2007, which happens to be the exact amount they’re going to be paying out in dividends over the next 12 months - or rather, "contemplating" paying that amount, according to the press release.
They’ve got more than enough cash ($630M) to buy in their existing long-term debt ($400M). Doing this will reduce interest expense (and add to cash flow) about $.30 per share. But they’ll also need more cash for ramped-up R&D spending and severance related to the layoffs of its U.S. salesforce (12% of the total workforce). They’re going to be spending about $125M (roughly $0.75/share) each year over the next four years for R&D. And they’ll book restructuring charges related to the layoffs in the fourth quarter, but the cash outflows related to this will not be confined to one period.
All things considered, unless they get a significant new product on the market, I think they’re going to need more cash than they’re currently generating to maintain their announced goals for a length of time. The $1.50 annual dividend plus $0.50 special dividend totals $2.00 per share. With projected operating cash flows of $2.00-$2.12 per share and an additional $0.30 in interest savings, I get to only around $2.40 in annual operating cash flow on the high end (my hunch is that guidance already factors in the interest savings). They’ll save on compensation costs in future periods, but near-term severance costs will use cash. Paying out more than the cash flow they generate should work this year with no problem, because they’ll have quite a bit of cash left over after buying in debt. But if capital expenditures are higher than expected, current products do not perform as projected or those in the pipeline don’t take off, they may have to increase short-term borrowing or cut back their dividend plans in another year or so.
This recent action makes me think that management is preparing for something on the horizon – like a private equity deal or acquisition. Why else would you elect to become debt free and start paying nearly all operating cash flow as a dividend? Does the founder/chairman/largest individual shareholder want to exploit the low price and take the company private for himself? If he wanted that, he’d be more likely to use the extra cash allocated for dividends to reduce the outstanding share count. It seems to me the founder wants to get the cash off the balance sheet in the event a buyer emerges to buy the whole company at a price he considers undervalued.
An Opportunity to Buy Pfizer on the Cheap?
Shares of drug maker Pfizer might drop precipitately at market open Monday, on the heels of an announcement that further development for a new blockbuster drug hopeful (torcetrapib) will be halted. Pfizer has pumped millions of dollars into the development of a drug they thought was going to be huge only to have their (and investor’s) hopes dashed. But that’s the drug business, and Pfizer still has more time to replenish its pipeline looking forward to 2011, when Lipitor, its top seller, loses patent protection. Maybe this replenishment won’t all come from one drug, as was hoped with torcetrapib/atorvastatin. But not being so dependent on one drug may turn out to be to Pfizer’s advantage, owing to the increased diversification benefits.
The concern now is with pipeline replenishment and thus revenue replacement. The company has frequently added to its product lineup with acquisitions, and this recent development may pressure them to be more aggressive in this space over the next few years. Meanwhile, with the prospect of declining revenues, the company is focused on cost reduction, having announced a week ago that it’s cutting its global workforce by 20%.
The bottom line is that even without torcetrapib in the pipeline, Pfizer still has a decent drug pipeline and cash to buy more drug assets. It’s a very financially strong company with a hefty dividend and tons of free cash flow. If shares drop 10-20%, as many analysts are expecting, it'll be a good opportunity to buy the stock. If the shares are down that much we’re talking about a stock with a 9-10% free cash flow yield, trading at 11-12 times forward earnings with a 4% dividend. At that price, a long-term buy and hold investor is likely to achieve above-average results.
The concern now is with pipeline replenishment and thus revenue replacement. The company has frequently added to its product lineup with acquisitions, and this recent development may pressure them to be more aggressive in this space over the next few years. Meanwhile, with the prospect of declining revenues, the company is focused on cost reduction, having announced a week ago that it’s cutting its global workforce by 20%.
The bottom line is that even without torcetrapib in the pipeline, Pfizer still has a decent drug pipeline and cash to buy more drug assets. It’s a very financially strong company with a hefty dividend and tons of free cash flow. If shares drop 10-20%, as many analysts are expecting, it'll be a good opportunity to buy the stock. If the shares are down that much we’re talking about a stock with a 9-10% free cash flow yield, trading at 11-12 times forward earnings with a 4% dividend. At that price, a long-term buy and hold investor is likely to achieve above-average results.
WB Wisdom
"Lethargy, bordering on sloth should remain the cornerstone of an investment style. "
- Warren Buffett
- Warren Buffett
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