Patience and More Patience
March 3rd, 2008
This market requires patience and more patience. Identify high quality companies you want to own, determine at what price and wait. That is what I’ve been doing. Also, since profit margins are hitting all time high, the “E” in the P/E equation is very deceiving. Earnings in many cases have been tremendously overly stretched to the upside: They’ll need to be un-stretched (i.e. normalized).
For instance, if you look at Moody’s (MCO), the stock, it may appear cheap, about 15 times 2007 earnings. Not bad for a legal duopoly. But MCO’s earnings are up tremendously since 2004. I’d argue that earnings since 2004 were bubbled by the housing-derivatives-easy-credit bubble. Thus when valuing MCO I’d put little faith in 2007-2008 numbers and go back to more normal times with 2004 EPS of 1.50 (as opposed to $2.50 MCO earned in 2007).
I’d gladly pay 14-15 times earnings for this still incredible business, thus Moody’s will go on my “Stocks I’d Love to Own” list at $21-22. Yes, stock has to decline 40% for me to become interested. Am I too conservative? Will I miss buying a great company? Possibly, but there are plenty of other great companies where this one came from.
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2 Comments Add your own
1. Hudson Cashdan | March 4th, 2008 at 12:10 am
How is this a great company? I’m about to begin looking at this company for the first time but it seems to me they are privileged to have been granted a government-mandated monopoly. It also seems to me that this monopoly has outlived its useful life- as evidenced by the recent credit debacle- and will have to come to an end in the very near future. The government will likely try to involve itself in many aspects of the banking industry and most new regulations will probably be futile at best but more likely counter-productive. But ending the preferred status for the rating agencies seems like a logical and obvious regulatory change
2. Tom L | March 4th, 2008 at 6:14 pm
Jackson Hewitt getting slammed today. Do you still recommend it?
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