With no compelling reason to be pessimistic today, Wall Street started the week off strong Monday, bidding stocks higher as Europe took further steps to stop the bleeding in Greece. Data today also show an abrupt jump in consumer borrowing, with Americans taking nearly $20 billion worth of debt in May, up sharply from the $10.9 billion more citizens borrowed in April. When all was said and done, the Dow Jones Industrial Average (DJINDICES: ^DJI ) tacked on 89 points, or 0.6%, to end at 15,225.�
UnitedHealth Group (NYSE: UNH ) led all blue chips higher Monday, adding 2.1%, as the health insurer enjoyed the benefits of a favorable article in Barron's, making the case for a 40% run-up in the stock over the next several years. The staggered rollout of Obamacare is cited as the major catalyst for the stock's potential in the bullish piece, which Wall Street clearly paid attention to. Shares even hit a 52-week high during trading today.
Top 10 Blue Chip Stocks To Buy 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 Dan Moskowitz]
Apple is one of the strongest brands in the world. With�quality leadership and an enormous amount of cash available, it should only be a matter of time before the stock begins to please investors. However, the key word in the previous sentence was ��hould�� The market has been slightly under the weather since Ben Bernanke hinted that he may begin to unwind monetary stimulus later this year. Is this yet another incredible buying opportunity for the market, or have the past few years been a facade and the wheels are about to come off? There are many opinions on both sides, but nobody knows the answer to that question with certainty. The market behaves in strange ways and often in ways the masses don�� expect. The point here is that there are increased risks due to external events. Even if the market continues its ascent, it�� too early for the iWatch excitement.
- [By Victor Mora]
Apple strives to provide innovative products and services that consumers and companies �love to own. Activist investor Carl Icahn has revealed that he has a big stake in the company. The stock has been surging higher in recent years and is now breaking above a base that was formed this year. Over the last four quarters, earnings have been mixed while revenue figures have been rising which has led to mixed feelings among investors in the company. Relative to its peers and sector, Apple has been a weak year-to-date performer. Look for Apple to OUTPERFORM.
- [By Victor Mora]
Apple is an innovative company that has been providing products and services that consumers and companies have been happy to purchase. The rumored products, as well as as the most recent positive earnings report, may generate some buzz for the company. The stock has not done very well in the last few months, but may be stabilizing around current prices. Over the last four quarters, investors in the company have had mixed feelings, as earnings have mostly been decreasing, while revenue has been rising. Relative to its peers and sector, Apple has been a weak year-to-date performer. WAIT AND SEE what Apple does this coming quarter.
- [By Victor Mora]
Apple strives to provide innovative products and services that consumers and companies �love to own. The company has seen a flurry of news lately as activist investor Carl Icahn has revealed that he has a big stake in the company and the iPad is seeing stiff competition in China. The stock has moving higher over the last few years and is currently breaking above a solid base. Over the last four quarters, earnings have been mixed while revenues have been rising which has produced mixed feelings about investors in the company. Relative to its peers and sector, Apple has been a weak year-to-date performer. Look for Apple to OUTPERFORM.
Top 10 Blue Chip Stocks To Buy 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 Victor Mora]
McDonald�� provides highly demanded food items to significant amounts of consumers who enjoy their items around the world. The stock has done very well for investors of the last several years and is now trading at all-time high prices. Earnings and revenue figures have done reasonably well, however, investors have expected a little more from the company. Relative to its strong peers and sector, McDonald’s has been a performance leader, year-to-date. Look for McDonald’s to continue to OUTPERFORM.
- [By Victor Mora]
McDonald�� is a well-recognized company that fulfills cravings and demand for quick and delicious food choices that many consumers across the globe enjoy. The company continues to adopt new technologies in order to enhance their customer experience. The stock has been rising in recent years but is now pulling back a bit as investors book gains. Over the last four quarters, earnings and revenues have been on the rise, however, investors have expected a little more from the company. Relative to its peers and sector, McDonald’s has been an average year-to-date performer. WAIT AND SEE what McDonald’s does this quarter.
Best Low Price Stocks To Buy 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 Victor Mora]
Chevron provides essential energy products and services to growing companies and consumers worldwide. The stock has been on a bullish run for many years that has taken it to all-time high prices. Over the last four quarters, earnings and revenue figures have been mixed, however, investors in the company have been mostly happy with earnings reports. Relative to its peers and sector, Chevron has been a year-to-date performance leader. Look for Chevron to OUTPERFORM.
- [By Victor Mora]
Chevron is an oil and gas bellwether that provides essential energy products and services to consumers and companies worldwide. The company recently won a bid to explore�for shale gas in western Lithuania. The stock is currently bouncing off an upward sloping trendline and may continue to do so. Over the last four quarters, earnings and revenues have been mixed, which has produced mixed feelings among investors in the company. Relative to its peers and sector, Chevron has been a year-to-date performance leader. Look for Chevron to OUTPERFORM.
- [By Teresa Rivas]
Shares of Chevron (CVX) were up 0.7% in recent trading, on the heels that it has reached a settlement with Brazilian prosecutors.
Chevron and Transocean (RIG) were named in the $20 billion lawsuit over a 2011 oil spill off the southeast coast of the country, and both parties are expected to sign off on the deal today, reports The Wall Street Journal. Criminal charges against executives have already been dropped.
The move comes at a delicate time for Brazil��hile many energy companies are eager to tap the nations resources and appetite, some criticized the government of overacting to the spill; the settlement should calm some ruffled feathers a month before the country will auction off rights to what ��s believed to be one of the largest oil fields ever discovered in deep ocean waters,��notes the Journal.
However, Transocean didn�� get any bump from the news, and was trading down 1.5% at recent check.� Both names have lagged the index in the past year: While the S&P 500 has gained nearly 15% in the last 12 months, Chevron is up 5.7% and Transocean is up just 1.7%.
Other oil majors like Exxon (XOM) and ConocoPhillips (COP) are also up today.
Update: Reuters is reporting that Chevron� is considering bid for stake in a Brazil offshore oil prospect (via Briefing.com).
- [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 Stocks To Buy 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).
- [By Victor Mora]
Visa facilitates transactions for consumers, companies, governments, and other entities around the world. The company recently reported earnings that have sat really well with investors. The stock has been steadily trending higher and is now trading near all-time high prices. Over the last four quarters, earnings and revenue figures have been increasing which has really pleased investors. Relative to its strong peers and sector, Visa has been an average year-to-date performer. Look for Visa to OUTPERFORM.
Top 10 Blue Chip Stocks To Buy 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 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?
No.
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.
How?
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.
Norfolk Southern
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 Victor Mora]
IBM is a global technology company that provides widely-adopted �products and services to companies and consumers. Recently, the company issued a positive earnings report for the last quarter. The stock has not made much progress this year, but is now seeing a post-earnings pop. Over the last four quarters, earnings have been decreasing, while revenue figures have been increasing, which has produced mixed feelings among investors. Relative to its peers and sector, IBM has been a weak year-to-date performer. WAIT AND SEE what IBM does in coming weeks.
Top 10 Blue Chip Stocks To Buy 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%
Top 10 Blue Chip Stocks To Buy 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 Victor Mora]
Philip Morris provides cigarette and tobacco products through established brands to an increasing consumer base around the world. The stock has done very well over the last few years and is now trading at all-time high prices. Earnings and revenue figures have been increasing and decreasing, in recent quarters, which has confused investors a bit. Relative to its strong peers and sector, Philip Morris has been an average year-to-date performer. Look for Philip Morris to OUTPERFORM.
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