See an article I recently wrote here. In this piece, I am arguing that yesterday’s selloff is not a watershed event and basically a non event. Jeff Macke called the article a very Russian one, when I inquired why he explained "My ancestors ate frozen wood while staving off Napoleon. 300 points doesn’t scare me."
But 2.3% decline on 25% plus appreciation over last 12 months? That is not just me being "tough Russian" that is just common sense. This sell of in financials created opportunities in two of my favorite stocks First Marblehead (FMD) and US Bancorp (USB) (OK, USB is less of a favorite, but 5.2% yield and ultra conservative management is what I look for in a bank, I don’t want any lending heroism or Star-Treckish will go where nobody has gone before).
Also, Jos A Bank (JOSB) lost 10 points in over last couple weeks, and its valuation is very alluring at this point. A weak economy may shave off couple points of its growth rate over next couple years, but it should still do EPS growth somewhere in the mid-teens.
July 27th, 2007
After Motorola (MOT) threw in the towel on making money in cell phones this year, is it a good buy?
It was not three years ago. This analysis is still valid today.
In fact, Motorola’s failure is a big positive for Nokia (NOK) on many fronts: it shows that Nokia’s management can execute despite not having the “hottest” phone on the market.
Also, it will be further taking market share from Motorola: I estimate its margins will further improve, driving its earnings north of $2 a share over next couple years. The best part is it doesn’t have to do anything heroic to achieve that. Operational leverage (i.e. higher volumes spread over fixed costs) and a shift to a higher margin (i.e. more feature-rich phones) will do the work. I am not as enthusiastic about the stock as I was a year or two ago, but I still see some room for growth.
Disclosure: I own Nokia stock
July 12th, 2007
By Vitaliy Katsenelson, CFA
This is an excerpt from a comment I read on Daily Speculation. It is such a common misperception that I had to write a response:
“Great stocks [Google, Apple] are to be owned. Companies who dominate their space are to be kept and allowed to grow. Those who have built fantastic franchise names should be accumulated. Buy Google over Yahoo. Apple over Dell. And most importantly, the speculator should be willing to hold on, eschewing the quick buck in search of the really big gains that can be achieved through diligence and patience.”
I could not disagree more with this conclusion. In the long run, the performance of a stock in isolation (ignoring the external environment, i.e. interest rates, risk, inflation) is the product of fundamentals (i.e. earnings and cash flow growth) and valuation (i.e. P/E, P/CF).
Google (GOOG) and Apple (AAPL) may have great fundamentals: their innovation has led and may continue to lead to high earnings and cash flow growth. But are they good stocks? They may or may not be. But, more importantly, will they be good stocks at any price? No! If I were to follow the above conclusion, that since Google and Apple are great companies they are great stocks at any price, at any valuation – at 50, 500, 5000 times earnings, then I’d walk into an overvaluation trap.
Take a look at eBay (EBAY) in the late 90s: it was a great company (it still is), but it was grossly overvalued. So, if you bought it in the late 90s and held it until today, despite its earnings going up 100-fold, the stock is roughly at the same level it was then. I’d argue few would have the patience and conviction to hold it through the downturn the stock took in the early ’00s. Most investing in the stock in the late 90s lost money on it.
One of the biggest mistakes investors make in investing is failing to separate a good company and a good stock. A great company’s (fundamental) performance is wiped out by valuation compression. This is the battle of two winds: the tailwind of earnings growth and the headwind of P/E compression.
Also, with a high growth priced appropriately (even to perfection) there is no room for even a small mistake (no margin of safety) left in the valuation - a small disappointment (it doesn’t have to be much) will lead to a substantial decline in price. The latest performance of Starbucks (SBUX) and Whole Foods (WHMI) stocks is a great example of being priced for perfection and delivering slightly less-than-perfect results.
This myopia in differentiating between good companies and good stocks is not just limited to wonderful, exciting, larger-than-life (Google comes to mind here), fast-growing internet companies. The bluest of the blue chip stocks, like GE (GE), Coca Cola (KO), Home Depot (HD), Amgen (AMGN), Johnson and Johnson (JNJ) (and the list goes on) were all great companies that one “had to own” but were terrible (overvalued) stocks in the late 90s. Their earnings have doubled or tripled since but the stocks have not gone anywhere.
I think it was Benjamin Graham who said that “price is what you pay, value is what you get.”
July 7th, 2007
Who ever said, "vino veritas" (in wine, there is truth), hasn’t written enough. I say, "in writing veritas." MarketWatch asked me to write an article about one’s investment strategy in the interest rate environment on the horizon. When I first sat down to write, I thought that I was a bit neutral on the direction of interest rates. However, by the time I finished (as you’ll see), it was painfully obvious that interest rates are more likely to go down than up. It’s a story of global prosperity that has been in part prepped up by finite sources (mostly debt).
I would not bet my career or even a bottle of fine beer (Fat Tire - those in Colorado will know), but there are too many "uncertainties" on the horizon for higher interest rates. In the article, I offered two stocks, Glaxosmithkline (GSK) and Johnson & Johnson (JNJ) that should do well in any interest rate environment.
July 2nd, 2007
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