Where to invest now? – November 2009

Home/Newsletter Archives/Where to invest now? – November 2009

Where to invest now? – November 2009

 

19 November 2009

 

Dear Fellow Investor

I am always on the lookout to find out if there are any parts of the investment universe that are undervalued.

 

 

 

 

 

 

I do not have the resources or time to be able to do such analysis and thus rely on a few fund managers and market commentators I have come to respect.

I read their commentary and try to combine what they have said or written to form my own picture.

Usually one or two of them have ideas that I investigate further but its usually not all that clear as to what is undervalued.

The recent third quarter commentaries was however so clear as to what is undervalued that it was hard to miss.

 

Below are extracts of the Q3 reports (emphasis mine):

 

October 2009

 

Yet Another Plug for U.S. Quality Stocks

Our main argument is quantitative. Quality stocks (high, stable return and low debt) simply look cheap and have gotten painfully cheaper as the Fed beats investors into buying junk and other risky assets, a hair-of-the-dog strategy if ever there was one.

 

In our seven-year forecast the quality segment has a full seven-percentage-point lead per year over the whole S&P 500, or 9% over the balance ex-quality. This is now at genuine outlier levels.

 

In addition, there are qualitative arguments. We like owning high-quality blue chips if we are indeed going into a more difficult seven years than any we have faced since the 1970s.

 

The problems of reducing debt and the potential share dilution that can go with it as it did in Japan for a decade, particularly play to the strength of the largely debt-free high-quality companies.

 

And for nervous investors there is yet another reason for favoring quality stocks: their more than 50% foreign earnings component, which is higher than the balance of the S&P 500 with its heavy financial component.

 

In the long run, quality stocks have proven to be the one free lunch: you simply have not had to pay for the privilege of owning the great safe companies, as plain logic and established theory would both suggest.

 

 

October 2009

 

Quality continues to be a significant theme in our portfolios, as many companies with strong balance sheets that are leaders in their industries areavailable to us in the cheapest quintile of valuation.

 

This is particularly prevalent in (but not limited to) the technology sector, where companies have low or no debt, and cash balances that would see them through the most extreme business downturn.

 

These businesses typically attract premium valuations, but are now some of the cheapest in our investment universe. We have taken advantage of this unusual opportunity

 

Conclusion

While market pundits are counseling "de-risking" as their advice du jour, equities in general and value spreads in particular remain attractive despite the sharp run up of the last seven months.

 

History suggests that we are still in the early innings of this value cycle, with the next leg up likely to be driven by earnings increases in the context of a modest economic recovery.

 

We continue to find high quality companies in sectors experiencing near term stress where we believe research and patience are the ingredients for long term outperformance.

 

 

28 October 2009

 

Generally speaking, Greenblatt says the value today is predominantly in "higher quality business that didn't get hurt as badly in the recession" vs. the low-quality names like AIG and Fannie Mae which led the rally off the March lows.

 

Among the "beaten up stocks" currently ranked highly by Greenblatt's are construction companies, select retailers and McGraw-Hill.

 

If large quality companies are cheap I looked at a few possible candidates in the USA as identified by Joel Greenblatt's “Magic Formula” and sorted by price to earnings (“PE”) ratio.

Company

Price (17.11.09)

Debt/Equity (%)

Market cap (USD m)

PE Ratio

Dividend Yield (%)

Price to book

NOBLE CORP

44.76

17.5

11,724

7.1

0.4

1.8

ELI LILLY & CO

35.94

155.3

41,296

7.8

5.5

4.2

PFIZER INC

17.94

30.1

144,768

8.2

3.6

2.2

FOREST LABS INC

28.98

0.0

8,745

8.3

0.0

1.9

HARRIS CORP

45.12

68.7

5,943

9.3

2.0

3.1

CARDINAL HEALTH

31.49

41.8

11,421

9.5

2.2

2.3

DIAMOND OFFSHORE

103.58

15.0

14,399

10.2

0.5

4.0

LOCKHEED MARTIN

76.31

132.8

29,058

10.2

3.3

9.3

L-3 COMM HLDGS

79.34

77.8

9,221

10.3

1.8

1.4

PITNEY BOWES INC

25.07

N/A

5,193

10.4

5.7

67.8

NATL OILWELL VAR

46.13

6.9

19,295

10.4

0.9

1.4

NORTHROP GRUMMAN

56.03

33.1

17,580

10.5

3.1

1.4

RAYTHEON CO

50.21

25.4

19,241

10.6

2.5

2.0

GENERAL DYNAMICS

67.94

40.0

26,211

10.9

2.2

2.2

DISH NETWORK-A

22.15

N/A

9,898

11.2

0.0

N/A

GARMIN LTD

32.33

0.0

6,488

11.3

2.3

2.5

FLUOR CORP

45.37

5.7

8,121

11.4

1.1

2.6

AMGEN INC

56.28

49.9

56,963

12.0

0.0

2.5

AUTOZONE INC

142.62

N/A

7,112

12.1

0.0

N/A

JACOBS ENGIN GRP

38.88

2.5

4,818

12.1

0.0

1.8

BIOGEN IDEC INC

46.05

19.7

13,317

12.2

0.0

2.0

BRISTOL-MYER SQB

24.23

55.1

47,999

12.4

5.1

3.7

JOY GLOBAL INC

56.85

106.6

5,817

12.8

1.2

6.6

IBM

128.63

251.9

168,969

13.3

1.7

9.2

APOLLO GROUP-A

56.39

50.9

8,731

13.4

0.0

7.5

JOHNSON&JOHNSON

62.17

27.9

171,533

13.7

3.2

3.4

FISERV INC

48.73

158.2

7,499

13.7

0.0

2.6

LORILLARD INC

79.38

0.0

12,752

13.8

5.0

33.5

OMNICOM GROUP

37.26

87.2

11,597

13.9

1.6

2.9

ITT CORP

53.06

70.2

9,694

14.0

1.6

2.7

VIACOM INC-B

31.27

113.8

19,130

14.0

0.0

2.4

MCGRAW-HILL COS

31.85

98.9

10,030

14.0

2.8

6.0

AMERISOURCEBERGE

24.28

43.4

7,217

14.0

1.3

2.6

CA INC

22.36

44.6

11,666

14.1

0.7

2.4

AMDOCS LTD

27.01

0.0

5,509

14.1

0.0

1.7

DELL INC

15.95

47.1

31,192

14.4

0.0

6.7

CLOROX CO

60.21

N/A

8,418

14.4

3.3

N/A

DR PEPPER SNAPPL

27.78

135.1

7,058

14.5

0.0

2.3

MCKESSON CORP

63.74

40.5

17,081

14.8

0.8

2.5

TIME WARNER INC

32.55

94.5

38,005

14.8

2.3

1.1

UNITED TECH CORP

69.93

72.1

65,562

15.3

2.2

3.5

LABORATORY CP

74.19

102.0

7,879

15.3

0.0

3.9

QUEST DIAGNOSTIC

59.07

85.5

10,922

15.7

0.7

2.8

ROSS STORES INC

45.59

15.1

5,703

16.6

1.0

5.3

GAP INC/THE

22.31

1.1

15,569

16.8

1.5

3.3

COACH INC

34.48

2.0

10,997

17.9

0.9

6.0

AUTOMATIC DATA

44.01

14.5

22,209

18.3

3.1

3.9

EXPEDIA INC

24.96

66.3

7,207

20.5

0.0

2.8

MASTERCARD INC-A

231.00

8.8

29,973

21.2

0.3

9.3

DISCOVERY COMM-A

31.88

68.3

8,510

34.3

0.0

1.5

Source: List of companies – Magic Formula Investing (www.magicformulainvesting.com)

Financial information – Bloomberg (www.bloomberg.com)

 

Have you signed up for my free weekly newsletter "Investing that makes sense" yet?

Sign up now and receive articles like this in your inbox weekly.

And if you sign up now you will also receive a 10 page free bonus report – Enhanced Checklist for Value Investors – with over 30 proven checklist items to improve your investment returns.

 

I respect your privacy – Privacy Policy 

 

A list of cheap large European companies can be found on my article Dogs of the STOXX 2009 – Update

 
 
Kindly note that the output of the two screens above is just to identify possibly undervalued companies. It should just be a starting point for your analysis.
 
 
 
Next week Tuesday Nikki and I am off on holiday to South Africa. I am really looking forward to more sunny days and spending relaxing time with my family.
 
I have lined up some interesting guest posts for the first two weeks when I have limited internet access.
 
 
Your packing his bags analyst.
 
 
Tim du Toit
Disclosure: I have a position in Johnson & Johnson

 


By | 2017-05-19T15:10:39+00:00 November 19th, 2009|Tags: , |