This Week’s Best Investing Reads – Curated Links

Johnny HopkinsValue Investing NewsLeave a Comment

Here’s some of this week’s best investing reads:

Hot Stock Rally Tests The Patience Of A Choosy Lot: Value Investors (WSJ)

Business vs. Investing, w/ Jason Zweig and Morgan Housel – [Invest Like the Best, EP.50] (The Investor’s Fieldguide)

The Canadian Housing Market is Bananas (A Wealth of Common Sense)

Risks Are Rising While Low Risks Are Discounted (Ray Dalio – LinkedIn)

Investing Matters: To Companies And Countries (Forbes)

Only a Market of Stocks (The Irrelevant Investor)

The Worst Market Call of All Time… and What It Tells Us Today (Investment U)

Value investor who’s doubled the market in the last year sees low returns from here (CNBC)

The Great Passive Investing Bait-And-Switch (The Felder Report)

Sam Zell on Global Growth: “Where’s the Demand?” (CFA Institite Enterprising Investor)

Interest rates are up, inflation is down – what is going on? (The Globe & Mail)

Insights from the World’s Top Academic FX Researcher (Alpha Architect)

David Tepper still loves stocks: ‘You’re nowhere near an overheated market’ (CNBC)

Undervalued Canfor Pulp FCF/EV Yield 13%, ROE 15% – Canada All TSX Stock Screener

Johnny HopkinsStocksLeave a Comment

One of the cheapest stocks in our Canada All TSX Stock Screener is Canfor Pulp Products Inc (TSE:CFX).

Canfor Pulp Products Inc (Canfor) produces and supplies pulp and paper products in the Americas, Europe, and Asia. The Company’s operations consist of Northern Bleach Softwood Kraft pulp mills (NBSK) and NBSK pulp and paper mill in Canada.

A quick look at Canfor’s share price history over the past twelve months shows that the price is up 21%, but here’s why the company remains undervalued.

The following data is from the company’s latest financial statements, dated June 2017. (All amounts are in Canadian Dollars).

The company’s latest balance sheet shows that Canfor has $92 Million in total cash and cash equivalents. Further down the balance sheet we can see that the company has $50 Million in long-term debt. Therefore, Canfor has a net cash position of $42 Million (cash minus debt).

If we consider that Canfor currently has a market cap of $831 Million, when we subtract the net cash totaling $42 Million that equates to an Enterprise Value of $789 Million.

If we move over to the company’s latest income statements we can see that Canfor has $121 Million in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 6.52, or 6.52 times operating earnings. That places Canfor squarely in undervalued territory.

The Acquirer’s Multiple is defined as:

Enterprise Value/Operating Earnings*

*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.

It’s also important to note that if we take a look at the company’s latest cash flow statements we can see that Canfor generated trailing twelve month operating cash flow of $168 Million and had $68 Million in Capex. That equates to $100 Million in trailing twelve month free cash flow, or a FCF/EV Yield of 13%. The company has also spent $11 Million (ttm) buying back shares and $17 Million (ttm) on dividends, providing shareholders with a shareholder yield of 3%.

What seems to get overlooked is that Canfor’s current revenues of $1.140 Billion are the second highest in the last ten years with the one exception being the record high revenues of $1.175 Billion recorded in FY2015. Worth noting however, is that FY2015 free cash flow was $77 Million compared to the $100 Million (ttm) that we see today. That’s an increase of 29%. Also worth noting is that the company’s BVPS of $7.65 (ttm) is an historical high as is its operating cash flow of $168 Million (ttm).

Lastly, its also worth considering Canfor’s annualized Return on Equity (ROE) for the quarter ending June 2017. A quick calculation shows that the company had $502 Million in equity for the quarter ending March 2017 and $502 Million for the quarter ending June 2017. If we divide that number by two we get $502 Million. If we consider that the company has $77 Million (ttm) in net income, that equates to an annualized Return on Equity (ROE) for the quarter ending June 2017 of 15%.

In terms of Canfor’s current valuation, the company is trading on a P/E of 10.9 compared to its 5Y average of 19.7**, a P/S of 0.7 compared to its 5Y average of 5.7**, and a P/B of 1.7 compared to its 5Y average of 1.9**. Canfor has a FCF/EV Yield of 13% and an Acquirer’s Multiple of 6.52, or 6.52 times operating earnings. The company has an annualized Return on Equity (ROE) for the quarter ending June 2017 of 15% and a shareholder yield of 3%. All of which indicates that Canfor is undervalued.

** Morningstar

About The Canada All TSX Stock Screener (CAGR 19.1%)

Over a full eighteen-and-one-half year period from January 2, 1999 to June 16, 2017, the Canada All TSX stock screener generated a total return of 2,536 percent, or a compound growth rate (CAGR) of 19.1 percent per year. This compared favorably with the S&P/TSX Composite TR, which returned a cumulative total of 232 percent, or 4.7 percent compound.

The 13 Commandments of Successful Value Investing – The Art of Value Investing

Johnny HopkinsInvesting StrategyLeave a Comment

One of the best books ever written on value investing is, The Art of Value Investing, by John Heins and Whitney Tilson. Bill Ackman of Pershing Square Capital Management said the following about The Art of Value Investing:

“I learned the investment business largely from the work and thinking of other investors. The Art of Value Investing is a thoughtfully organized compilation of some of the best investment insights I have ever read. Read this book with care. It will be one of the highest-return investments you will ever make.”

One of my favorite parts of the book is in Chapter 1 – “All Sensible Investing Is Value Investing”, which provides the 13 commandments of what makes a successful value investor.

Here’s an excerpt from the book:

“All Sensible Investing Is Value Investing”

A walk down any supermarket aisle makes it clear we live in a world of increasing product specialization. To break into a new market or grab more of an existing one, companies launch a dizzying array of new products in ever-more-specific categories. Want your soda with more caffeine or less? You’ve got it. More sugar? Less sugar? Six ounces, 10 ounces, 20 ounces? Whatever you like.

This trend has not been lost on marketers of investment vehicles. Specialized mutual funds and exchange-traded funds exist for almost every imaginable combination of manager style, geographic reach, industry sector, and company market capitalization size. If you’re looking for a mid-cap growth fund focused on the commodity sector in so-called BRIC countries (Brazil, Russia, India and China), you’re likely to find it.

We understand the marketing reality of specialization, but we argue that the most important factor in judging an investor’s prospective gains or losses is his or her underlying philosophy. As you might guess from the fact that we co-founded a newsletter called Value Investor Insight, we agree 100 percent with Berkshire Hathaway’s Vice Chairman Charlie Munger, who says simply that “all sensible investing is value investing.”

But what exactly does it mean to be a value investor? At its most basic level it means seeking out stocks that you believe are worth considerably more than you have to pay for them. But all investors try to do that. Value investing to us is both a mindset as well as a rigorous discipline, the fundamental characteristics of which we’ve distilled down to a baker’s dozen.

Value investors typically:

1. Focus on intrinsic value—what a company is really worth—buying when convinced there is a substantial margin of safety between the company’s share price and its intrinsic value and selling when the margin of safety is gone. This means not trying to guess where the herd will send the stock price next.

2. Have a clearly defined sense of where they’ll prospect for ideas, based on their competence and the perceived opportunity set rather than artificial style-box limitations.

3. Pride themselves on conducting in-depth, proprietary, and fundamental research and analysis rather than relying on tips or paying attention to vacuous, minute-to-minute, cable-news-style analysis.

4. Spend far more time analyzing and understanding micro factors, such as a company’s competitive advantages and its growth prospects, instead of trying to make macro calls on things like interest rates, oil prices, and the economy.

5. Understand and profit from the concept that business cycles and company performance often revert to the mean, rather than assuming that the immediate past best informs the indefinite future.

6. Act only when able to draw conclusions at variance to conventional wisdom, resulting in buying stocks that are out-of-favor rather than popular.

7. Conduct their analysis and invest with a multiyear time horizon rather than focusing on the month or quarter ahead.

8. Consider truly great investment ideas to be rare, often resulting in portfolios with fewer, but larger, positions than is the norm.

9. Understand that beating the market requires assembling a portfolio that looks quite different from the market, not one that hides behind the safety of closet indexing.

10. Focus on avoiding permanent losses rather than minimizing the risk of stock-price volatility.

11. Focus on absolute returns, not on relative performance versus a benchmark.

12. Consider stock investing to be a marathon, with winners and losers among its practitioners best identified over periods of several years, not months.

13. Admit their mistakes and actively seek to learn from them, rather than taking credit only for successes and attributing failures to bad luck.

Undervalued AU Optronics FCF/EV Yield 17%, ROE 18% – All Investable Stock Screener

Johnny HopkinsStocksLeave a Comment

One of the cheapest stocks in our All Investable Stock Screener is AU Optronics Corp (ADR) (NYSE:AUO).

AU Optronics Corp. (AU Optronics) is a thin-film-transistor liquid-crystal display (TFT-LCD) panel provider. The company operates in two business segments: display business and solar business. Through its display business segment, the company designs, develops, manufactures, assembles and markets flat panel displays and most of its products are TFT-LCD panels. Its panels are primarily used in televisions, monitors, mobile personal computers (PCs), mobile devices and commercial and other applications (such as displays for automobiles, industrial PCs, automated teller machines, point of sale terminals and pachinko machines). Through its solar business segment, the company is capable of manufacturing upstream and midstream products, such as ingots, solar wafers and solar cells. Through the company’s subsidiaries AUO Crystal Corp. and M.Setek Co., Ltd. (M.Setek), it mainly focuses on research, production and sales of solar materials, such as ingots and solar wafers.

A quick look at AU Optronics’ share price history over the past twelve months shows that the price is down 4%, but here’s why the company is undervalued.

(Source: Google Finance)

The following data is from the company’s latest financial statements, dated June 2017.

The company’s latest balance sheet shows that AU Optronics has $3.414 Billion in total cash and cash equivalents. Further down the balance sheet we can see that the company has $3.492 Billion in long-term debt and $629 Million in short-term debt. Therefore, AU Optronics has a net debt position of $707 Million (debt minus cash). For investors concerned about the net debt position it’s important to consider the company’s free cash flow position below.

If we consider that AU Optronics currently has a market cap of $3.734 Billion, when we add the net debt totaling $707 Million and minority interests of $553 Million that equates to an Enterprise Value of $4.994 Billion.

If we move over to the company’s latest income statements we can see that AU Optronics has $1.315 Billion in trailing twelve month operating earnings* which means that the company is currently trading on an Acquirer’s Multiple of 3.79, or 3.79 times operating earnings*. That places AU Optronics squarely in undervalued territory.

The Acquirer’s Multiple is defined as:

Enterprise Value/Operating Earnings*

*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.

If we take a look at the company’s latest cash flow statements we can see that AU Optronics generated trailing twelve month operating cash flow of $2.063 Billion and had $1.231 Billion in Capex. That equates to $832 Million in trailing twelve month free cash flow, or a FCF/EV Yield of 17%.

Something else worth keeping in mind is AU Optronics’ annualized Return on Equity (ROE) for the quarter ending June 2017. A quick calculation shows that the company had $6.140 Billion in equity for the quarter ending March 2017 and $6.425 Billion for the quarter ending June 2017. If we divide that number by two we get $6.282 Billion in average equity. If we consider that the company has $1.137 Billion (ttm) in net income, that equates to an annualized Return on Equity (ROE) for the quarter ending June 2017 of 18%.

In terms of AU Optronics’ current valuation, the company is trading on a P/E of 3.2 compared to its 5Y average of 19.2**, a P/B of 0.6 compared to its 5Y average of 0.7**, and a P/S of 0.3 compared to its 5Y average of 0.3**. The company has a FCF/EV Yield of 17% (ttm) and an Acquirer’s Multiple of 3.79, or 3.79 times operating earnings*. AU Optronics has an annualized Return on Equity (ROE) for the quarter ending June 2017 of 18% and provides a dividend yield of 3% (ttm). All of which indicates that the company is undervalued.

** Morningstar

About The All Investable Stock Screener (CAGR 25.9%)

Over a full sixteen-and-one-half year period from January 2, 1999 to July 26, 2016., the All Investable stock screener generated a total return of 5,705 percent, or a compound growth rate (CAGR) of 25.9 percent per year. This compared favorably with the Russell 3000 TR, which returned a cumulative total of 265 percent, or 5.7 percent compound.

Charles Munger – It Is Ridiculous That Investors Cling On To Failed Ideas

Johnny HopkinsCharles MungerLeave a Comment

In 2003 Charles Munger gave a great talk to the students in the Economics Department at The University of California. While his talk focused on the strengths and weaknesses in teaching academic economics he also provided a number of great lessons for investors including the importance of being able to destroy your own wrong ideas.

Here’s an excerpt from that speech:

Clinging to failed ideas – a horror story

As I conclude, I want to tell one more story demonstrating how awful it is to get a wrong idea from a limited repertoire and just stick to it. And this is the story of Hyman Liebowitz who came to America from the old country. In the new country, as in the old, he tried to make his way in the family trade, which was manufacturing nails. And he struggled and he struggled, and finally his little nail business got to vast prosperity, and his wife said to him, “You are old, Hyman, it’s time to go to Florida and turn the business over to our son.”

So down he went to Florida, turning his business over to the son, but he got weekly financial reports. And he hadn’t been in Florida very long before they turned sharply negative. In fact, they were terrible. So he got on an airplane and he went back to New Jersey, where the factory was. As he left the airport on the way to the factory he saw this enormous outdoor advertising sign lighted up. And there was Jesus, spread out on the cross. And under it was a big legend, “They Used Liebowitz’s Nails.” So he stormed into the factory and said, “You dumb son! What do you think you’re doing? It took me 50 years to create this business!” “Papa,” he said, “trust me. I will fix it.”

So back he went to Florida, and while he was in Florida he got more reports, and the results kept getting worse. So he got on the airplane again. Left the airport, drove by the sign, looked up at this big lighted sign, and now there’s a vacant cross. And, low and behold, Jesus is crumpled on the ground under the cross, and the sign said, “They Didn’t Use Liebowitz’s Nails.” (Laugher).

Well, you can laugh at that. It is ridiculous but it’s no more ridiculous than the way a lot of people cling to failed ideas. Keynes said “It’s not bringing in the new ideas that’s so hard. It’s getting rid of the old ones.” And Einstein said it better, attributing his mental success to “curiosity, concentration, perseverance and self-criticism.” By self-criticism he meant becoming good at destroying your own best-loved and hardest-won ideas. If you can get really good at destroying your own wrong ideas, that is a great gift.

Undervalued Avadel Pharmaceuticals FCF/EV Yield 21%, ROE 59% – All Investable Stock Screener

Johnny HopkinsStocksLeave a Comment

One of the cheapest stocks in our All Investable Stock Screener is Avadel Pharmaceuticals PLC (NASDAQ:AVDL).

Avadel Pharmaceuticals PLC (Avadel) is a specialty pharmaceutical company developing and commercializing pharmaceutical products. The company’s products include Bloxiverz, Vazculep, Akovaz, Karbinal ER, AcipHex Sprinkle, Cefaclor and Flexichamber.

A quick look at Avadel’s share price history over the past twelve months shows that the price is down 21%, but here’s why the company is undervalued.

(Source: Google Finance)

The following data is from the company’s latest financial statements, dated June 2017.

The company’s latest balance sheet shows that Avadel has $174 Million in total cash and cash equivalents. Further down the balance sheet we can see that the company has $1 Million in long-term debt and no short-term debt. Therefore, Avadel has a net cash position of $173 Million (cash minus debt).

If we consider that Avadel currently has a market cap of $346 Million, when we subtract the net cash totaling $173 Million that equates to an Enterprise Value of $173 Million.

If we move over to the company’s latest income statements we can see that Avadel has $75 Million in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 2.30, or 2.30 times operating earnings. That places Avadel squarely in undervalued territory.

The Acquirer’s Multiple is defined as:

Enterprise Value/Operating Earnings*

*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.

If we take a look at the company’s latest cash flow statements we can see that Avadel generated trailing twelve month operating cash flow of $37 Million and had $1 Million in Capex. That equates to $36 Million in trailing twelve month free cash flow, or a FCF/EV Yield of 21%. The company has also spent $13.1 Million (ttm) buying back shares, providing shareholders with a shareholder yield of 4%.

Something else worth keeping in mind is Avadel’s annualized Return on Equity (ROE) for the quarter ending June 2017. A quick calculation shows that the company had $59 Million in equity for the quarter ending March 2017 and $77 Million for the quarter ending June 2017. If we divide that number by two we get $68 Million in average equity. If we consider that the company has $40 Million (ttm) in net income, that equates to an annualized Return on Equity (ROE) for the quarter ending June 2017 of 59%.

In terms of Avadel’s current valuation, the company has 50% of its market cap in cash. Net current assets totaling $204 Million exceed its total liabilities of $182 Million by $22 Million. Avadel’s trading on a P/E of 9.4 compared to its 5Y average of 22.5**, a P/B of 4.5 compared to its 5Y average of 13.2**, and a P/S of 2.1 compared to its 5Y average of 9.6**. The company has a FCF/EV Yield of 21% (ttm) and an Acquirer’s Multiple of 2.30, or 2.30 times operating earnings. Avadel has an annualized Return on Equity (ROE) for the quarter ending June 2017 of 59% (ttm) and provides a shareholder yield of 4% (ttm). All of which indicates that the company is undervalued.

** Morningstar

About The All Investable Stock Screener (CAGR 25.9%)

Over a full sixteen-and-one-half year period from January 2, 1999 to July 26, 2016., the All Investable stock screener generated a total return of 5,705 percent, or a compound growth rate (CAGR) of 25.9 percent per year. This compared favorably with the Russell 3000 TR, which returned a cumulative total of 265 percent, or 5.7 percent compound.

Mohnish Pabrai – If Your Investment Thesis Requires You To Fire Up Excel, It Should Be A Big Red Flag

Johnny HopkinsMohnish PabraiLeave a Comment

I just finished re-reading one of my favorite investing books, The Dhando Investor, by Mohnish Pabrai. One of my favorite parts of the book covers Pabrai’s methodology when it comes to putting together an investment thesis. His thesis is in accordance with Buffett and Munger’s age old adage of keeping it simple.

Here’s an excerpt from the book:

Simplicity is a very powerful construct. Henry Thoreau recognized this when he said, “Our life is frittered away by detail . . . simplify, simplify.” Einstein also recognized the power of simplicity, and it was the key to his breakthroughs in physics. He noted that the five ascending levels of intellect were, “Smart, Intelligent, Brilliant, Genius, Simple.” For Einstein, simplicity was simply the highest level of intellect.

Everything about Warren Buffett’s investment style is simple. It is the thinkers like Einstein and Buffett, who fixate on simplicity, who triumph. The genius behind E=mc2 is its simplicity and elegance.

Everything about Dhandho is simple, and therein lies its power. As we see in Chapter 15, the psychological warfare with our brains really gets heated after we buy a stock. The most potent weapon in your arsenal to fight these powerful forces is to buy painfully simple businesses with painfully simple theses for why you’re likely to make a great deal of money and unlikely to lose much. I always write the thesis down. If it takes more than a short paragraph, there is a fundamental problem. If it requires me to fire up Excel, it is a big red flag that strongly suggests that I ought to take a pass.

Reminiscences of a Stock Operator – “Men Who Can Both Be Right And Sit Tight Are Uncommon.”

Johnny HopkinsJesse LivermoreLeave a Comment

Reminiscences of a Stock Operator is a classic investing book that focuses on the character Larry Livingston, which is really a depiction of Jesse Livermore, one of the most highly regarded traders of all time.

The book provides a first person account of Livingston’s journey which started in the stock trading bucket shops before the great depression. Livingston’s skill was in figuring out anticipated price moves based on the ticker tape and whilst this worked on a small scale it was much harder to apply on Wall Street, eventually leaving him broke a number of times.

It wasn’t until he met Mr Partridge, or “Old Turkey” as the traders used to call him, that he eventually figured out what he was doing wrong. Instead of picking up small changes in price movements and making small profits, Old Turkey would hold positions through the short-term price fluctuations and make larger profits as prices eventually moved further up. This is what led to Livingston’s eventual success and his famous quote, “Men who can both be right and sit tight are uncommon.”

While the book is set in the early twentieth century, this lesson still remains one of the main reasons that investors have continued to under-perform since then and will continue to underperform into the future. Investors are unable to ride out short-term price fluctuations that will eventually lead to a stock’s out-performance.

Here’s an excerpt from the book:

Most -let us call ’em customers -are alike. You find very few who can truthfully say that Wall Street doesn’t owe them money. In Fullerton’s there were the usual crowd. All grades! Well, there was one old chap who was not like the others. To begin with, he was a much older man. Another thing was that he never volunteered advice and never bragged of his winnings. He was a great hand for listening very attentively to the others.

He did not seem very keen to get tips that is, he never asked the talkers what they’d heard or what they knew. But when somebody gave him one he always thanked the tipster very politely. Sometimes he thanked the tipster again when the tip turned out O.K. But if it went wrong he never whined, so that nobody could tell whether he followed it or let it slide by.

It was a legend of the office that the old jigger was rich and could swing quite a line. But he wasn’t donating much to the firm in the way of commissions; at least not that anyone could see. His name was Partridge, but they nicknamed him Turkey behind his back, because he was so thick-chested and had a habit of strutting about the various rooms, with the point of his chin resting on his breast.

The customers, who were all eager to be shoved and forced into doing things so as to lay the blame for failure on others, used to go to old Partridge and tell him what some friend of a friend of an insider had advised them to do in a certain stock. They would tell him what they had not done with the tip so he would tell them what they ought to do. But whether the tip they had was to buy or to sell, the old chap’s answer was always the same.

The customer would finish the tale of his perplexity and then ask: “What do you think I ought to do?” Old Turkey would cock his head to one side, contemplate his fellow customer with a fatherly smile, and finally he would say very impressively, “You know, it’s a bull market!”

Time and again I heard him say, “Well, this is a bull market, you know!” as though he were giving to you a priceless talisman wrapped up in a million-dollar accident insurance policy. And of course I did not get his meaning.

One day a fellow named Elmer Harwood rushed into the office, wrote out an order and gave it to the clerk. Then he rushed over to where Mr. Partridge was listening politely to John Fanning’s story of the time he overheard Keene give an order to one of his brokers and all that John made was a measly three points on a hundred shares and of course the stock had to go up twenty-four points in three days right after John sold out. It was at least the fourth time that John had told him that tale of woe, but old Turkey was smiling as sympathetically as if it was the first time he heard it.

Well, Elmer made for the old man and, without a word of apology to John Fanning, told Turkey, “Mr. Partridge, I have just sold my Climax Motors. My people say the market is entitled to a reaction and that I’ll be able to buy it back cheaper. So you’d better do likewise. That is, if you’ve still got yours.”

Elmer looked suspiciously at the man to whom he had given the original tip to buy. The amateur, or gratuitous, tipster always thinks he owns the receiver of his tip body and soul, even before he knows how the tip is going to turn out.

“Yes, Mr. Harwood, I still have it. Of course!” said Turkey gratefully. It was nice of Elmer to think of the old chap. “Well, now is the time to take your profit and get in again on the next dip,” said Elmer, as if he had just made out the deposit slip for the old man. Failing to perceive enthusiastic gratitude in the beneficiary’s face Elmer went on: “I have just sold every share I owned!”

From his voice and manner you would have conservatively estimated it at ten thousand shares. But Mr. Partridge shook his head regretfully and whined, “No! No! I can’t do that!”

“What?” yelled Elmer.

“I simply can’t!” said Mr. Partridge. He was in great trouble.

“Didn’t I give you the tip to buy it?”

“You did, Mr. Harwood, and I am very grateful to you. Indeed, I am, sir. But ”

“Hold on! Let me talk! And didn’t that stock go up seven points in ten days? Didn’t it?”

“It did, and I am much obliged to you, my dear boy. But I couldn’t think of selling that stock.”

“You couldn’t?” asked Elmer, beginning to look doubtful himself. It is a habit with most tip givers to be tip takers.

“No, I couldn’t.”

“Why not?” And Elmer drew nearer.

“Why, this is a bull market!” The old fellow said it as though he had given a long and detailed explanation.

“That’s all right,” said Elmer, looking angry because of his disappointment. “I know this is a bull market as well as you do. But you’d better slip them that stock of yours and buy it back on the reaction. You might as well reduce the cost to yourself.”

“My dear boy,” said old Partridge, in great distress “my dear boy, if I sold that stock now I’d lose my position; and then where would I be?”

Elmer Harwood threw up his hands, shook his head and walked over to me to get sympathy: “Can you beat it?” he asked me in a stage whisper. “I ask you 1” I didn’t say anything. So he went on: “I give him a tip on Climax Motors. He buys five hundred shares. He’s got seven points’ profit and I advise him to get out and buy ’em back on the reaction that’s overdue even now. And what does he say when I tell him? He says that if he sells he’ll lose his job. What do you know about that?”

“I beg your pardon, Mr. Harwood; I didn’t say I’d lose my job,” cut in old Turkey. “I said I’d lose my position. And when you are as old as I am and you’ve been through as many booms and panics as I have, you’ll know that to lose your position is something nobody can afford; not even John D. Rockefeller. I hope the stock reacts and that you will be able to repurchase your line at a substantial concession, sir. But I myself can only trade in accordance with the experience of many years. I paid a high price for it and I don’t feel like throwing away a second tuition fee. But I am as much obliged to you as if I had the money in the bank. It’s a bull market, you know.” And he strutted away, leaving Elmer dazed.

What old Mr. Partridge said did not mean much to me until I began to think about my own numerous failures to make as much money as I ought to when I was so right on the general market. The more I studied the more I realized how wise that old chap was. He had evidently suffered from the same defect in his young days and knew his own human weaknesses. He would not lay himself open to a temptation that experience had taught him was hard to resist and had always proved expensive to him, as it was to me.

I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling the other customers, “Well, you know this is a bull market!” he really meant to tell them that the big money was not in the individual fluctuations but in the main movements that is, not in reading the tape but in sizing up the entire market and its trend.

And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.

I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance.

The reason is that a man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. That is why so many men in Wall Street, who are not at all in the sucker class, not even in the third grade, nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight. Old Turkey was dead right in doing and saying what he did. He had not only the courage of his convictions but the intelligent patience to sit tight.

Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market your game is to buy and hold until you believe that the bull market is near its end. To do this you must study general conditions and not tips or special factors affecting individual stocks. Then get out of all your stocks; get out for keeps! Wait until you see or if you prefer, until you think you see the turn of the market; the beginning of a reversal of general conditions.

You have to use your brains and your vision to do this; otherwise my advice would be as idiotic as to tell you to buy cheap and sell dear. One of the most helpful things that anybody can learn is to give up trying to catch the last eighth or the first. These two are the most expensive eighths in the world. They have cost stock traders, in the aggregate, enough millions of dollars to build a concrete highway across the continent.

Undervalued Gilead Sciences FCF/EV Yield 13%, ROE 57%, ROIC 40% – All Investable Stock Screener

Johnny HopkinsStocksLeave a Comment

One of the cheapest stocks in our All Investable Stock Screener is Gilead Sciences, Inc. (NASDAQ:GILD).

Gilead Sciences Inc (Gilead) is a biopharmaceutical company that discovers, develops and commercializes new medicines in areas of unmet medical need. Its products target a number of areas, such as HIV, liver diseases, cardiovascular and other diseases.

A quick look at Gilead’s share price history over the past twelve months shows that the price is down 8%, but here’s why the company is undervalued.

The following data is from the company’s latest financial statements, dated June 2017.

The company’s latest balance sheet shows that Gilead has $21.096 Billion in total cash and cash equivalents. Further down the balance sheet we can see that the company has $26.296 Billion in long-term debt and no short-term debt. Therefore, Gilead has a net debt position of $5.200 Billion (debt minus cash).

If we consider that Gilead currently has a market cap of $96.508 Billion, when we add the net debt totaling $5.200 Billion and the minority interests totaling $414 Million that equates to an Enterprise Value of $102.122 Billion.

If we move over to the company’s latest income statements we can see that Gilead has $16.465 Billion in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 6.20, or 6.20 times operating earnings. That places Gilead squarely in undervalued territory.

The Acquirer’s Multiple is defined as:

Enterprise Value/Operating Earnings*

*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.

It’s also important to note that if we take a look at the company’s latest cash flow statements we can see that Gilead generated trailing twelve month operating cash flow of $14.005 Billion and had $608 Million in Capex. That equates to $13.397 Billion in trailing twelve month free cash flow, or a FCF/EV Yield of 13%. The company has also spent $2.695 Billion (ttm) buying back shares and $2.609 Billion (ttm) on dividend distributions, providing shareholders with a shareholder yield of 6%.

In terms of the company’s annualized Return on Invested Capital (ROIC) for the quarter ending June 2017. A quick calculation shows that the company had $33.123 Billion in invested capital for the quarter ending March 2017 and $28.291 Billion for the quarter ending June 2017. If we divide that number by two we get $30.707 Billion in average invested capital. If we then consider that the company had $16.465 Billion (ttm) in operating income multiplied by the tax rate (1 – 25.42%), that equates to NOPAT of $12.279 Billion (ttm). Then when we divide the NOPAT of $12.279 Billion (ttm) by the average invested capital of $30.707 Billion that equates to an annualized Return on Invested Capital (ROIC) for the quarter ending June 2017 of 40% (ttm).

Lastly, its also worth considering Gilead’s annualized Return on Equity (ROE) for the quarter ending June 2017. A quick calculation shows that the company had $20.441 Billion in equity for the quarter ending March 2017 and $22.677 Billion for the quarter ending June 2017. If we divide that number by two we get $21.559 Billion. If we consider that the company has $12.213 Billion (ttm) in net income, that equates to an annualized Return on Equity (ROE) for the quarter ending June 2017 of 57%.

In terms of Gilead’s current valuation, the company is trading on a P/E of 8 compared to its 5Y average of 20**, a P/B of 4.2 compared to its 5Y average of 8.2**, and a P/S of 3.4 compared to its 5Y average of 6.9**. The company has a FCF/EV Yield of 13% (ttm) and an Acquirer’s Multiple of 6.20, or 6.20 times operating earnings. Gilead has an annualized Return on Equity (ROE) for the quarter ending June 2017 of 57% (ttm) and an annualized Return on Invested Capital (ROIC) for the quarter ending June 2017 of 40% (ttm).  The company also provides a shareholder yield of 6% (ttm). All of which indicates that Gilead is undervalued.

** Morningstar

About The All Investable Stock Screener (CAGR 25.9%)

Over a full sixteen-and-one-half year period from January 2, 1999 to July 26, 2016., the All Investable stock screener generated a total return of 5,705 percent, or a compound growth rate (CAGR) of 25.9 percent per year. This compared favorably with the Russell 3000 TR, which returned a cumulative total of 265 percent, or 5.7 percent compound.

This Week’s Best Investing Reads – Curated Links

Johnny HopkinsValue Investing NewsLeave a Comment

Here’s a list of this week’s best investing reads:

The Biggest Common Investment Errors (A Wealth of Common Sense)

The Market Really Is Different This Time (Jason Zweig)

Stock Picking vs. Portfolio Construction The Role of Checklists (Fundoo Professor)

If This is 1929… (The Irrelevant Investor)

Bull Trap? (The Felder Report)

A Dozen Lessons about Business and Investing from Poker (25iq)

Inverting the Money Problem (Safal Niveshak)

Warren Buffett talks about his Mentor Benjamin Graham (We Study Billionaires)

Howard Marks: Passive investing making certain tech stocks a ‘dangerous place’ (CNBC)

Why Everyone Should Write (Collaborative Fund)

Please Stop Talking About the VIX So Much (Cliff’s Perspective)

Ruane Cunniff (Sequoia Fund) Investor Day Transcript 2017 (Market Folly)

“Shiller P-E” Still Wrong Signal (Commentaries – Advisor Perspectives)

Diversification Benefits of Time Series Momentum (Alpha Architect)

Leon Cooperman: I find Bill Ackman’s behavior ‘foolish’ and ‘irresponsible’ (CNBC)

Walter Schloss – The Key To Purchasing An Undervalued Stock Is Its Price COMPARED To Its Intrinsic Worth

Johnny HopkinsWalter J. SchlossLeave a Comment

One of our favorite investors here at The Acquirer’s Multiple is Walter Schloss. Schloss averaged a 16% total return after fees during five decades as a stand-alone investment manager, versus 10% for the S&P 500. Warren Buffet said the following about Schloss is his famous article, The Superinvestors of Graham-and-Doddsville:

“He [Schloss] simply says, if a business is worth a dollar and I can buy it for 40 cents, something good may happen to me. And he does it over and over and over again. He owns many more stocks than I do—and is far less interested in the underlying nature of the business; I don’t seem to have very much influence on Walter. That’s one of his strengths: no one has much influence on him.

Schloss always said that the price of a security compared to its intrinsic value was the most important factor to use in valuing a stock. Back in 1974, Schloss wrote a piece for the Financial Analysts Journal, in which he writes a counter-argument to Sidney Cottle’s theory that security analysis is ‘the discipline of comparative selection’.

Here’s an excerpt from that article:

I note in your Editor’s Comment in your September/October issue, you quote Sidney Cottle as saying: “Security analysis is ‘the discipline of comparative selection.’ Since stocks are only under- or over-priced with respect to each other, the process of comparison is going to identify over-and under-priced stocks with roughly the same frequency in good markets and bad.”

I’m not sure what you have said above is what Mr. Cottle means but I must say as a security analyst, I take exception to this point of view. I believe stocks should be evaluated based on their intrinsic worth, NOT on whether they are over- or under-priced in relationship with each other. For example, at the top of a bull market one can find stocks that may be cheaper than others but they both may be selling much above their intrinsic worth.

If one were to recommend the purchase of Company A because it was COMPARATIVELY cheaper than Company B, he may find that he will sustain a tremendous loss. On the other hand, if a stock sells at, say, one-third of its intrinsic value based on sound security analysis, one can buy it irrespective of whether other stocks are over- or under-priced.

Stocks are NOT over-priced or under-priced compared to other companies but compared to themselves. The key to the purchase of an undervalued stock is its price COMPARED to its intrinsic worth. (Congratulations on printing Ben Graham’s article on “The Future of Common Stocks.” It was excellent!) -Walter J. Schloss C.F.A. Walter J. Schloss Associates New York.

Undervalued LyondellBasell FCF/EV Yield 9%, ROE 55%, ROIC 30% – Large Cap 1000 Stock Screener

Johnny HopkinsStocksLeave a Comment

One of the cheapest stocks in our Large Cap 1000 Stock Screener is LyondellBasell Industries NV (NYSE:LYB).

LyondellBasell Industries NV (LyondellBasell) is a petrochemical producer operating in US and Europe. It produces polyethylene and propylene oxide used in various consumer and industrial end products.

A quick look at LyondellBasell’s share price history over the past twelve months shows that the price is up 19%, but here’s why the company remains undervalued.

(Source: Google Finance)

The following data is from the company’s latest financial statements, dated June 2017.

The company’s latest balance sheet shows that LyondellBasell has $2.012 Billion in total cash and cash equivalents. Further down the balance sheet we can see that the company has $563 Million in short-term debt and $8.496 Billion in long-term debt. Therefore, LyondellBasell has a net debt position of $7.047 Billion (debt minus cash). For those investors concerned about the company’s net debt position, it’s important to understand LyondellBasell’s free cash flow position below.

If we consider that LyondellBasell currently has a market cap of $35.132 Billion, when we add the net debt totaling $7.047 Billion and minority interests totaling $2 Million that equates to an Enterprise Value of $42.181 Billion.

If we move over to the company’s latest income statements we can see that LyondellBasell has $5.084 Billion in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 8.29, or 8.29 times operating earnings. That places LyondellBasell squarely in undervalued territory.

The Acquirer’s Multiple is defined as:

Enterprise Value/Operating Earnings*

*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.

It’s also important to note that if we take a look at the company’s latest cash flow statements we can see that LyondellBasell generated trailing twelve month operating cash flow of $5.283 Billion and had $1.981 Billion in Capex. That equates to $3.302 Billion in trailing twelve month free cash flow, or a FCF/EV Yield of 8%. The company has also spent $1.826 Billion (ttm) buying back shares and $1.401 Billion (ttm) on dividends, providing shareholders with a shareholder yield of 9% (ttm).

In terms of the company’s annualized Return on Invested Capital (ROIC) for the quarter ending June 2017. A quick calculation shows that the company had $13.858 Billion in invested capital for the quarter ending March 2017 and $13.915 Billion for the quarter ending June 2017. If we divide that number by two we get $13.886 Billion. If we then consider that the company had $5.084 Billion (ttm) in operating income multiplied by the tax rate (1 – 28.8%), that equates to NOPAT of $4.131 Billion (ttm). Then when we divide the NOPAT of $4.131 Billion (ttm) by the average invested capital of $13.886 Billion that equates to an annualized Return on Invested Capital (ROIC) for the quarter ending June 2017 of 30% (ttm).

Lastly, its also worth considering LyondellBasell’s annualized Return on Equity (ROE) for the quarter ending June 2017. A quick calculation shows that the company had $6.462 Billion in equity for the quarter ending March 2017 and $6.866 Billion for the quarter ending June 2017. If we divide that number by two we get $6.664 Billion. If we consider that the company has $3.643 Billion (ttm) in net income, that equates to an annualized Return on Equity (ROE) for the quarter ending June 2017 of 55% (ttm). The company also remains financially sound with a Piotroski F-Score of 6, an Altman Z-Score of 4.38, and a Beneish M-Score of -2.73.

In terms of LyondellBasell’s current valuation, the company is trading on a P/E of 9.9 compared to its 5Y average of 11.5**. The company has a FCF/EV Yield of 8% (ttm) and an Acquirer’s Multiple of 8.29, or 8.29 times operating earnings. LyondellBasell has an annualized Return on Equity (ROE) for the quarter ending June 2017 of 55% (ttm), and an annualized Return on Invested Capital (ROIC) for the quarter ending June 2017 of 30% (ttm).  The company also provides a shareholder yield of 9% (ttm). All of which indicates that LyondellBasell is undervalued.

** Morningstar

About The Large Cap 1000 Stock Screener (CAGR 18.4%)

Over a full sixteen-and-a-half year period from January 2, 1999 to July 26, 2016., the Large Cap 1000 stock screener generated a total return of 1,940 percent, or a compound growth rate (CAGR) of 18.4 percent per year. This compared favorably with the Russell 1000 Total Return, which returned a cumulative total of 259 percent, or 5.6 percent compound.

Buffett Nears a Milestone He Doesn’t Want: $100 Billion in Cash

Johnny HopkinsWarren BuffettLeave a Comment

One of our favorite investors here at The Acquirer’s Multiple is of course Warren Buffett. This week Bloomberg reported that Buffett’s Berkshire Hathaway is sitting on $100 Billion at the end of its second quarter. The question is, what he is going to do with it?

Here’s an excerpt from the article:

It’s a milestone Warren Buffett probably wishes he weren’t approaching.

Berkshire Hathaway Inc., the conglomerate he’s run for more than five decades, reported Friday that it held just shy of $100 billion in cash at the end of the second quarter.

While that figure highlights the staggering money-making ability of the businesses he’s collected over the years, it’s also a burden. Because Berkshire doesn’t pay a dividend and rarely buys back its own stock, Buffett is on the hook to find ways to invest those funds.

“To put that money to work would be great,” said David Rolfe, chief investment officer at Wedgewood Partners, a money manager overseeing about $6 billion including Berkshire stock. But the “list of companies that he would like to own is very, very small.”

Buffett, 86, addressed the mounting cash pile at Berkshire’s annual meeting in May, saying he hadn’t put his “foot to the floor” on an acquisition for a while and shouldn’t keep so much money earning next to nothing for long periods. The war chest includes some cash-like securities, such as Treasuries.

“The question is, ‘Are we going to be able to deploy it?’” he told the thousands of shareholders gathered at the CenturyLink Center in Omaha, Nebraska. “I would say that history is on our side, but it’d be more fun if the phone would ring.”

Buffett has been finding a few places to invest. He built a holding in Apple Inc. through the beginning of this year. Then, in June, Berkshire made two smaller equity investments. One was a stake in a real estate investment trust and the other propped up Home Capital Group Inc., an embattled Canadian mortgage lender.

Most significantly, Berkshire’s utility arm struck a deal last month to buy Texas’s largest electric utility for about $9 billion. The transaction its being challenged by Paul Singer’s Elliott Management Corp., but completing it would make a sizable dent in the cash hoard.

Lots more is bound to pour in. Berkshire posted $4.26 billion in net income for the second quarter. The results were down 15 percent from a year earlier, partly on an underwriting loss at insurance businesses. But a number of Berkshire’s other subsidiaries — from railroad BNSF to its collection of manufacturing businesses — posted gains.

You can read the full article here.

Seth Klarman – There Is Only One Valid Rule For Selling – Margin of Safety

Johnny HopkinsSeth KlarmanLeave a Comment

One of our favorite investors here at The Acquirer’s Multiple is Seth Klarman. Klarman is a value investing legend who runs The Baupost Group, one of the largest hedge funds in the U.S. He also wrote one of the best books ever written on investing called Margin of Safety. In the book Klarman provides some great insight on one of the biggest problems facing investors, which is when to sell their stocks. Klarman says there’s is only one valid rule for selling.

Here’s an excerpt from the book:

Selling: The Hardest Decision of All

Many investors are able to spot a bargain but have a harder time knowing when to sell. One reason is the difficulty of knowing precisely what an investment is worth. An investor buys with a range of value in mind at a price that provides a considerable margin of safety. As the market price appreciates, however, that safety margin decreases; the potential return diminishes and the downside risk increases. Not knowing the exact value of the investment, it is understandable that an investor cannot be as confident in the sell decision as he or she was in the purchase decision.

To deal with the difficulty of knowing when to sell, some investors create rules for selling based on specific price-to-book value or price-to-earnings multiples. Others have rules based on percentage gain thresholds; once they have made X percent, they sell. Still others set sale price targets at the time of purchase, as if nothing that took place in the interim could influence the decision to sell.

None of these rules makes good sense.

Indeed, there is only one valid rule for selling: all investments are for sale at the right price. Decisions to sell, like decisions to buy, must be based upon underlying business value.’ Exactly when to sell—or buy—depends on the alternative opportunities that are available. Should you hold for partial or complete value realization, for example? It would be foolish to hold out for an extra fraction of a point of gain in a stock selling just below underlying value when the market offers many bargains. By contrast, you would not want to sell a stock at a gain (and pay taxes on it) if it were still significantly undervalued and if there were no better bargains available.

Some investors place stop-loss orders to sell securities at specific prices, usually marginally below their cost. If prices rise, the orders are not executed. If the prices decline a bit, presumably on the way to a steeper fall, the stop-loss orders are executed. Although this strategy may seem an effective way to limit downside risk, it is, in fact, crazy. Instead of taking advantage of market dips to increase one’s holdings, a user of this technique acts as if the market knows the merits of a particular investment better than he or she does.

Liquidity considerations are also important in the decision to sell. For many securities the depth of the market as well as the quoted price is an important consideration. You cannot sell, after all, in the absence of a willing buyer; the likely presence of a buyer must therefore be a factor in the decision to sell. As the president of a small firm specializing in trading illiquid overthe-counter (pink-sheet) stocks once told me: “You have to feed the birdies when they are hungry.”

If selling still seems difficult for investors who follow a value investment philosophy, I offer the following rhetorical questions:

  • If you haven’t bought based upon underlying value, how do you decide when to sell?
  • If you are speculating in securities trading above underlying value, when do you take a profit or
    cut your losses?
  • Do you have any guide other than “how they are acting,” which is really no guide at all?

Undervalued Express Scripts FCF/EV Yield 11%, Shareholder Yield 9% – Large Cap 1000 Stock Screener

Johnny HopkinsStocksLeave a Comment

One of the cheapest stocks in our Large Cap 1000 Stock Screener is Express Scripts Holding Company (NASDAQ:ESRX).

Express Scripts Holding Co (Express) is a pharmacy benefit manager in the United States. It offers healthcare management and administration services such as managed care organizations, health insurers, workers’ compensation plans and government health programs.

A quick look at Express’ share price history over the past twelve months shows that the price is down 18%, but here’s why the company is undervalued.

The following data is from the company’s latest financial statements, dated June 2017.

The company’s latest balance sheet shows that Express has $2.353 Billion in total cash and cash equivalents. Further down the balance sheet we can see that the company has $1.151 Billion in short-term debt and $13.835 Billion in long-term debt. Therefore, Express has a net debt position of $12.633 Billion (debt minus cash). While some investors may be concerned about the company’s net debt position it’s important to understand the company’s free cash flow position below.

If we consider that Express currently has a market cap of $36.114 Billion, when we add the net debt totaling $12.633 Billion that equates to an Enterprise Value of $48.747 Billion.

If we move over to the company’s latest income statements we can see that Express has $5.324 Billion in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 9.15, or 9.15 times operating earnings. That places Express squarely in undervalued territory.

The Acquirer’s Multiple is defined as:

Enterprise Value/Operating Earnings*

*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.

It’s also important to note that if we take a look at the company’s latest cash flow statements we can see that Express generated trailing twelve month operating cash flow of $5.811 Million and had $277 Million in Capex. That equates to $5.534 Billion in trailing twelve month free cash flow, or a FCF/EV Yield of 11%. The company has made smart capital allocation decisions with regards its free cash flow, spending $3.447 Billion (ttm) buying back shares and providing shareholders with a shareholder yield of 9%, while reducing the company’s debt by $541 Million (ttm).

What seems to get overlooked is that Express’ current revenues of $100.276 Billion (ttm) are inline with the FY2016 revenues of $100.288 Billion and only fractionally lower than the record revenues of $104.099 Billion set in FY2013. Additionally, Express’ current net profit of $3.506 Billion (ttm), free cash flow of $5.533 Billion (ttm), and EPS of $5.71 (ttm) are all at historical highs.

Lastly, its also worth considering Express’ annualized Return on Equity (ROE) for the quarter ending June 2017. A quick calculation shows that the company had $15.923 Billion in equity for the quarter ending March 2017 and $15.745 Billion for the quarter ending June 2017. If we divide that number by two we get $15.834 Billion. If we consider that the company has $3.506 Billion (ttm) in net income, that equates to an annualized Return on Equity (ROE) for the quarter ending June 2017 of 22%.

With all of the above in mind it is difficult to understand Express’ current P/E of 10.9 compared to its 5Y average of 27.9**. This is a company that traded on a P/E close to 40 back in July of 2013. Express has a FCF/EV Yield of 11% and an Acquirer’s Multiple of 9.15, or 9.15 times operating earnings. The company has an annualized Return on Equity (ROE) for the quarter ending June 2017 of 22% and a shareholder yield of 9%. All of which indicates that Express is undervalued.

** Morningstar

About The Large Cap 1000 Stock Screener (CAGR 18.4%)

Over a full sixteen-and-a-half year period from January 2, 1999 to July 26, 2016., the Large Cap 1000 stock screener generated a total return of 1,940 percent, or a compound growth rate (CAGR) of 18.4 percent per year. This compared favorably with the Russell 1000 Total Return, which returned a cumulative total of 259 percent, or 5.6 percent compound.

Rich Pzena – There Are Many Factors Contributing To The Opportunities In Value Stocks Today

Johnny HopkinsRichard PzenaLeave a Comment

Pzena Investment Management recently released its Q2 2017 commentary saying:

Improving fundamentals coupled with wide valuation spreads make for an attractive environment for deep value stocks. Self-help measures have been an important contributor to an improved profit picture.

The article goes on to say:

The strong value run of 2016 paused in the first half of 2017 as market leadership shifted to growth. A narrow range of tech stocks – the FAANGs in the U.S. and Alibaba and Tencent in China – lead the pack in those regions. This abrupt shift leaves one wondering whether the value cycle is over, or if the environment is conducive to a resumption of value outperformance.

Three criteria typically set up the opportunity for extended value outperformance:

  • Uncertainty, either broad-based or company-specific,which creates
  • Wide valuation spreads between companies punished forthese uncertainties and those favored by investors, then
  • A dissipation of uncertainties which leads to there-rating of value stocks.

There are many such cases of uncertainty today. Whether it be major U.S. banks that are just regaining the confidence of investors a decade after the global financial crisis, European industrials whose valuations have been punished by a painfully slow economic recovery, Japanese companies put in the penalty box for a generation of low shareholder returns, or emerging market businesses cheap for their own specific reasons, there is a long list of companies suffering from uncertainty. Valuation spreads between these companies and the much-loved growth darlings and bond proxies are still near 50-year highs (Figure 1).

Figure 1: Valuation Spreads Are Still Extreme
1Q vs 5Q Spreads by Region, expressed in Standard Deviationse


Note: Data as of June 30, 2017.
Source: Sanford C. Bernstein & Co., Pzena analysis.

Yet when we look around the world, we see reasons for optimism. U.S. banks just received their best report card since the financial crisis. European order books are filling, and profits are inflecting higher. Companies around the world have undertaken extensive self-help measures creating the opportunity for accelerated profit recovery with even modest top-line support. And green shoots are appearing in unexpected places – corporate actions are unlocking value in Korean chaebols, Chinese state owned enterprises have initiated dividends, and Japanese managements have renewed focus on corporate governance and shareholder returns. A clear-eyed view of the landscape shows a broad picture of opportunity.

A GOOD ENVIRONMENT FOR VALUE

There are many factors contributing to the opportunities in value stocks today beyond favorable valuations and improving fundamentals. Companies have demonstrated an ability to adjust their cost structures and implement self-help measures to improve current returns and set themselves up for significant incremental earnings, as top-line growth re-emerges.

There are also many idiosyncratic opportunities driven by factors outside of general economic conditions (the U.S. pharmaceutical supply chains come to mind). None of these drivers is dependent on the prospects for reduced regulation, infrastructure investments, and lower taxes in the U.S. which helped drive sentiment in late 2016, but are becoming more doubtful of late. We see government-led stimulus as additional upside but not a requirement for value stocks to resume leadership. Of course, there are still uncertainties that can derail continued recovery, but barring such extraordinary events, we believe there is ample evidence that conditions provide a favorable environment for the value investor.

You can read the complete commentary here.

Jeremy Grantham – The Market Appears Not To Care At All About The Past Or To Learn Much From It

Johnny HopkinsJeremy GranthamLeave a Comment

One of our favorite investors here at The Acquirer’s Multiple is Jeremy Grantham at GMO. GMO recently released its Q2 2017 Commentary in which Grantham highlights that while many believe we are living in a new era of investing, behaviorally nothing has changed in 92 years.

Here’s an excerpt from that commentary:

Now, cutting across that previous attempt to understand these major changes in our new 20-year era, comes an entirely behavioral approach. Whether sensibly or not, investors love high margins and like stable growth even if it’s modest, and hate inflation. They felt this way from 1925 to 1997 and they felt exactly the same way in our new era of 1997 to 2017. So, behaviorally it is absolutely not a new era.

It is precisely – to a 0.90 correlation – the same ole same ole. The peaks of 1929 and 1965 delivered favorable margins and inflation inputs but for a very short while in both cases. In contrast, the period of 1997 to 2017 has delivered to investors their preferred conditions almost the entire time, with only two very quick time-outs for market breaks. Can the market really be this easy to explain?

Well, it has been for 92 years! And what can we investors do with this information? It tells us that if we re-enter a period of old normal profits and old normal inflation, the market’s P/E will indeed mean revert to its old average.

And if we don’t re-enter such a period, the P/Es are likely to stay high. It tells us separately that if we expect a market crash, we should also expect to have a crash in margins (as we did in 2008-09) or a truly dramatic rise in sustained inflation (as we did in 1979-81) or some powerful combination. All of which is possible of course, but I think improbable, at least in the near term. This behavioral approach to explaining shifts in P/Es is certainly a much simpler equation than my previous stew-of-factors approach. But it does have some powerful similarities to my earlier arguments found in Parts 1 and 2 of “Not With A Bang But A Whimper”.

In both approaches, the role of profit margins is dominant. Improved margins not only move the earnings up directly, but also the P/E multiplier applied to those earnings. Inflation is also a strong secondary factor in both approaches, for low inflation, of course, drives down the interest rates, which appear to be an important ingredient in the stew.

So, where does this leave us? It suggests to me that I have in general been over-intellectualizing the working of the market for a few decades. I have had too strong a belief that investors would at least be influenced by past data in a sensible way. The market, however, appears not to care at all about the past or to learn much from it. This model for sure seems to say that for 92 years, at least, the market has with remarkable consistency been a coincident indicator of superficially appealing variables that in a strict economic sense have been inappropriate, and that have caused spectacular and unnecessary market volatility. The model is apparently a reflection of human nature and, of all factors influencing the market, human nature, as economically inefficient and unsophisticated it may be, seems the least likely to change.

This Week’s Best Investing Reads – Curated Links

Johnny HopkinsValue Investing NewsLeave a Comment

Here’s a list of this week’s best investing reads:

A Millennial’s Rebuttal (The Irrelevant Investor)

By This Measure The Current Stock Market Bubble Is Far Bigger Than The Dotcom Bubble (The Felder Report)

a modest proposal (The Reformed Broker)

The Crypto Currency Debate: Future of Money or Speculative Hype? (Musings On Markets)

How Filter Bubbles Distort Reality: Everything You Need to Know (Farnam Street)

Investing in the Misunderstood (MicroCapClub)

Asymmetric Polarization (The Big Picture)

What Happens in an Internet Minute in 2017? (Visual Capitalist)

Leigh Drogen – Sink or Swim–How to Combine Quant and Traditional Asset Management Techniques – Invest Like the Best, EP.48] (The Investors Field Guide)

A Dozen Lessons about Business and Investing from Poker (25iq)

The Best Books on Financial Market History (A Wealth of Common Sense)

My “Repackaging” Pet Peeve: Do Other Advisors See This As Well? (Alpha Arhitect)

The Most Important Moat (Base Hit Investing)

The Most Dangerous Kind of Learning (Collaborative Fund)

The Future of Digital Banking: What’s Next? (CFA Institute Institute Enterprising Investor)