When it comes to buying value stock picks there are some things to be aware of. Now is the time to take advantage of getting higher quality stocks at reasonable prices.
http://www.howmuchyouwill.com/stocks-picks-in-value-stocks
Showing posts with label buying good companies. Show all posts
Showing posts with label buying good companies. Show all posts
Tuesday 9 February 2010
Tuesday 2 February 2010
How an investor picks "good" businesses to invest
Buy Good Companies
This investor invests in "good' businesses. What are "good" businesses?
Although he buy shares with the expectation that he will one day sell them, he prefers to hold on to them for a number of years and rides the companies' performance.
If he will commit at least 5% of his assets to a company, he must be sure that it has a considerably more than a fair chance of working out.
Though he does not want to control the business, he sees himself as owner of a business and its surplus cash flow.
He expects to get his returns from the company's profitable operations as these become reflected in the price of its shares.
(This stance is considerably different from that of value investors who buy cheap stocks that have fallen below the reproduction cost of the assets and wait for the market to realise that it has overreacted.)
He looks for other signs that identify the kind of good businesses he covets.
High profit margins are a positive mark; these make the company's earnings less vulnerable to changes in the level of sales. They may also indicate that the company is operating within a franchise and is less susceptible to having its profits eroded by a new entrant.
He likes duopolies, because the two firms generally do not compete intensely with one another, and certainly not on price, so each is left with a high return on capital. Monopolies, by contrast, are always subject to government intervention, either to break them up or regulate their earnings. And even if governments do nothing, they are an invitation to new competitors to try to capture some of their very lucrative business, often by using a newer technology that allows the entrant to leapfrog the incumbent with lower prices or better products.
In making his long-term commitments, he wants to invest with smart management that has the shareholders' interests in mind. He has had generally bad experiences when he tried to influence managers to change direction, and he is not contentious enough by temperament to enjoy the struggle. It may be true that a company being run by superior executives has nowhere to go but down once those managers leave, and that buying the stock of a poorly run company at a deeply depressed price can position the investor for a profit once management improves. But that is a speculative bet; sometimes bad management stays in place for decades.
He expects to own his stock for 4 or 5 years. He doesn't want to wait on the chance that better management will show up, and he doesn't want to lead a shareholder revolt to make that happen. All he needs to know is that the current managers are healthy and young enough to keep the company on course for a few more years.
Buy Them Cheap
He normally holds shares in 10 or even fewer companies, on average he needs to put a lot of money into any one name. Because great situations are so difficult to find, he is prepared to buy 20% or more of any one company.
While there are around 1,500 or more companies large enough for him to own, his "good business" requirement probably shrinks that list by 80%, leaving him with no more than 300 possible candidates. But even within this restricted universe, he is brutally selective.
He is looking for "two-inch putts," by which he means investments that will provide him with a high rate of return while subjecting him to a low level of risk. There is only one way he can meet that goal. He has to spot companies that meet all his standards and are still available at a price that will provide him a high rate of return based on future earnings growth.
He is not attracted to turnaround companies or cyclicals, where a successful investment depends on timing. He does not believe in speculating that an underperforming company will be taken over, because most managements resist selling out. Opportunities to make this kind of investment arise irregularly, and then due to unpredictable circumstances. For example, a change in government regulations can be the vehicle. The newness of the issue, and the volume of shares available at one time kept them cheap, at least initially.
Sometimes a cloud settles over whole industries based on little more than questionable assumptions about the future. This provides him opportunities to buy good companies cheap.
Glenn Greenberg of the Chieftain Capital Management.
This investor invests in "good' businesses. What are "good" businesses?
- They are unchallenged by new entrants.
- They have growing earnings.
- They are not vulnerable to being technologically undermined.
- They can generate enough free cash flow on a regular basis to make the shareholders happy, either through dividends, share repurchase, or intelligent reinvestment.
Although he buy shares with the expectation that he will one day sell them, he prefers to hold on to them for a number of years and rides the companies' performance.
If he will commit at least 5% of his assets to a company, he must be sure that it has a considerably more than a fair chance of working out.
Though he does not want to control the business, he sees himself as owner of a business and its surplus cash flow.
He expects to get his returns from the company's profitable operations as these become reflected in the price of its shares.
(This stance is considerably different from that of value investors who buy cheap stocks that have fallen below the reproduction cost of the assets and wait for the market to realise that it has overreacted.)
He looks for other signs that identify the kind of good businesses he covets.
High profit margins are a positive mark; these make the company's earnings less vulnerable to changes in the level of sales. They may also indicate that the company is operating within a franchise and is less susceptible to having its profits eroded by a new entrant.
He likes duopolies, because the two firms generally do not compete intensely with one another, and certainly not on price, so each is left with a high return on capital. Monopolies, by contrast, are always subject to government intervention, either to break them up or regulate their earnings. And even if governments do nothing, they are an invitation to new competitors to try to capture some of their very lucrative business, often by using a newer technology that allows the entrant to leapfrog the incumbent with lower prices or better products.
In making his long-term commitments, he wants to invest with smart management that has the shareholders' interests in mind. He has had generally bad experiences when he tried to influence managers to change direction, and he is not contentious enough by temperament to enjoy the struggle. It may be true that a company being run by superior executives has nowhere to go but down once those managers leave, and that buying the stock of a poorly run company at a deeply depressed price can position the investor for a profit once management improves. But that is a speculative bet; sometimes bad management stays in place for decades.
He expects to own his stock for 4 or 5 years. He doesn't want to wait on the chance that better management will show up, and he doesn't want to lead a shareholder revolt to make that happen. All he needs to know is that the current managers are healthy and young enough to keep the company on course for a few more years.
Buy Them Cheap
He normally holds shares in 10 or even fewer companies, on average he needs to put a lot of money into any one name. Because great situations are so difficult to find, he is prepared to buy 20% or more of any one company.
While there are around 1,500 or more companies large enough for him to own, his "good business" requirement probably shrinks that list by 80%, leaving him with no more than 300 possible candidates. But even within this restricted universe, he is brutally selective.
He is looking for "two-inch putts," by which he means investments that will provide him with a high rate of return while subjecting him to a low level of risk. There is only one way he can meet that goal. He has to spot companies that meet all his standards and are still available at a price that will provide him a high rate of return based on future earnings growth.
He is not attracted to turnaround companies or cyclicals, where a successful investment depends on timing. He does not believe in speculating that an underperforming company will be taken over, because most managements resist selling out. Opportunities to make this kind of investment arise irregularly, and then due to unpredictable circumstances. For example, a change in government regulations can be the vehicle. The newness of the issue, and the volume of shares available at one time kept them cheap, at least initially.
Sometimes a cloud settles over whole industries based on little more than questionable assumptions about the future. This provides him opportunities to buy good companies cheap.
Glenn Greenberg of the Chieftain Capital Management.
Always stick to good companies. Invest cleverly into these and these only.
When you buy shares, you own part of the company, including its assets.
Although the value of money decreases with inflation, your investment in a good company can increase as the company grows and the value of its assets increases.
Note that we say a 'good' company.
Not all companies are good companies and not all share prices will increase over time, simply because not all companies will expand and grow.
That is why it is important to be clever when you make equity investments.
Although the value of money decreases with inflation, your investment in a good company can increase as the company grows and the value of its assets increases.
Note that we say a 'good' company.
Not all companies are good companies and not all share prices will increase over time, simply because not all companies will expand and grow.
That is why it is important to be clever when you make equity investments.
Equities carry the highest risk. Why, then, invest in equities?
You can also make a lot of money investing in equities.
During the long term, US stocks gave a historical compound annual return of 11% to its investors. During the period January 1960 to December 2000, you could have earned a compound after tax return of 16.9% a year on your shares on the South African stock market.
Equities are one of the few asset classes that give you a real chance to fight inflation over the longer term.
The reason for this lies in the nature of equities. Equities are investments that give you part-ownership in a company.
Companies issue shares because they need money (or capital) to expand.
Note that we say a 'good' company.
Besides your share in a company's capital (i.e. its assets less its liabilities), you can also share in its profits by way of dividend payments to the company's shareholders. This is another reason why investment in equities provides one of the few opportunities to safeguard the REAL VALUE of your capital. The term 'real' is very important in investment terminology. It means that you have taken the impact of inflation into account.
During the long term, US stocks gave a historical compound annual return of 11% to its investors. During the period January 1960 to December 2000, you could have earned a compound after tax return of 16.9% a year on your shares on the South African stock market.
Equities are one of the few asset classes that give you a real chance to fight inflation over the longer term.
The reason for this lies in the nature of equities. Equities are investments that give you part-ownership in a company.
Companies issue shares because they need money (or capital) to expand.
- When you buy shares, you own part of the company, including its assets.
- That explains why, although the value of money decreases with inflation, your investment in a good company can increase as the company grows and the value of its assets increases.
Note that we say a 'good' company.
- Not all companies are good companies and not all share prices will increase over time, simply because not all companies will expand and grow.
- That is why it is important to be clever when you make equity investments.
Besides your share in a company's capital (i.e. its assets less its liabilities), you can also share in its profits by way of dividend payments to the company's shareholders. This is another reason why investment in equities provides one of the few opportunities to safeguard the REAL VALUE of your capital. The term 'real' is very important in investment terminology. It means that you have taken the impact of inflation into account.
Sunday 24 January 2010
Secret formula for winning was always staring in your face
People are always looking around for the secret formula for winning on Wall Street, when all along, it's staring them in the face: Buy shares in solid companies with earning power and don't let go of them without a good reason. The stock price going down is not a good reason.
To get that 11%, you have to pledge your loyalty to stocks for better or for the worse - this is a marriage we're talking about, a marriage between your money and your investments. You can be a genius at analysing which companies to buy, but unless you have the patience and the courage to hold on to the shares, you're an odds-on favorite to become a mediocre investor.
It is not always brainpower that separates good investors from bad; often, it's discipline.
To get that 11%, you have to pledge your loyalty to stocks for better or for the worse - this is a marriage we're talking about, a marriage between your money and your investments. You can be a genius at analysing which companies to buy, but unless you have the patience and the courage to hold on to the shares, you're an odds-on favorite to become a mediocre investor.
It is not always brainpower that separates good investors from bad; often, it's discipline.
Friday 13 November 2009
''We don't buy the cheapest stocks or the fastest-growing businesses. We buy the highest-quality companies.''
INVESTING WITH/Robert A. Schwarzkopf And Sandi L. Gleason; Kayne Anderson Rudnick Small-Mid Cap Fund
By CAROLE GOULD
Published: Sunday, June 17, 2001
AMERICA'S biggest blue-chip companies were once small businesses -- the kind that Robert A. Schwarzkopf and Sandi L. Gleason want for their $69.2 million Kayne Anderson Rudnick Small-Mid Cap fund.
''In an industry where most people classify themselves as growth or value investors, we decided to take another road,'' Mr. Schwarzkopf said from their offices in Century City in Los Angeles. ''We don't buy the cheapest stocks or the fastest-growing businesses. We buy the highest-quality companies in America.''
The companies' returns have been substantial. The fund rose 30.4 percent in the 12 months ended Thursday, compared with a 15.4 percent loss for the small-cap growth group and a 16.1 percent loss for the Standard & Poor's 500-stock index. For the three years ended Thursday, the fund gained 14.8 percent a year, on average, versus 10.4 percent for its group and 4.9 percent for the S.& P.
Mr. Schwarzkopf, 52, and Ms. Gleason, 36, also manage $2 billion for institutions and individuals for Kayne Anderson Rudnick Investment Management, the fund's adviser.
To find businesses with sustainable competitive advantages, the managers screen 8,000 United States companies for consistent earnings and revenue growth. They look for growth rates that have exceeded the industry average over 10 years.
The portfolio companies have a weighted average market capitalization of $2 billion, comparable to that of the benchmark Russell 2500 index.
The analysts look for rising free cash flow and low debt levels. ''Companies that have lots of cash and little debt are less financially risky,'' Mr. Schwarzkopf said, ''and they can take advantage of opportunities during difficult times, when other companies are struggling.''
The managers trim the pool to 250 companies by eliminating those whose management does not seem focused on building shareholder value, and those that do not dominate their markets. Further research helps them choose the 25 to 35 stocks in the fund. ''We want to find the best businesses, understand what makes them great so we can assess how long they will stay great companies, and determine how much we should pay for them,'' Mr. Schwarzkopf said.
The managers work with sector analysts and visit the companies. ''We want to understand how a company differentiates itself from competition,'' Ms. Gleason said, ''how it creates value for customers, and how it does that in a way that excludes competition.''
To reduce risk, they aim for a diversified portfolio that roughly replicates the Russell 2500 index.
They call their strategy ''quality at a reasonable price.'' The managers prefer companies with above-average return on equity and profit margins, but with below-average valuations based on price-to-sales and price-to-book ratios. Those correlations ''give you a good sense of how your company is valued relative to its industry,'' Ms. Gleason said.
They also review ranges of price-to-earnings multiples over 5 or 10 years. ''You get a P/E band range around which the stock trades,'' Ms. Gleason said. ''You can apply the high and low multiple to target earnings for each of five years to get a target price.''
They trim positions in stocks that reach their target price, and companies whose market capitalization grows too large or that cannot sustain their target growth rates.
IN March, the managers bought shares of the Black Box Corporation of Lawrence, Pa., at $43.42. Black Box, a global marketer of cable, networking and other communications equipment, has carved out a market niche by basing its selling primarily on service, not price, Mr. Schwarzkopf said. It offers technical service 365 days a year in 132 countries. In its last fiscal year, 99.2 percent of calls were answered within 20 seconds, according to the company.
The strategy has let Black Box generate double-digit net profit margins, he said, adding that it avoids economic cycles because it concentrates on the aftermarket, not infrastructure building. He expects 20 percent annual growth in earnings over the next three years.
On Friday, the stock closed at $62.94, compared with their 12-month target price of $75.
Another favorite is the Catalina Marketing Corporation of St. Petersburg, Fla., a leader in customized electronic coupons generated at checkout counters. The company's systems are used in about 15,000 supermarkets, she added, and it has annual and multiyear contracts with major consumer goods companies. It is also expanding into health care advertising linked to drug purchases. She expects earnings per share to grow 22 percent in each of the next three years.
The fund bought shares in March 2000 at a split-adjusted price of $30.14; they now trade at $31.68, compared with the managers' price target of $49.
The managers also like C. H. Robinson Worldwide, a transportation company based in Eden Prairie, Minn. The company dominates a domestic market, Mr. Schwarzkopf said, by using its data processing systems to match small local trucking companies with the needs of large packaged-goods companies.
''They serve as a marketing and information technology department for thousands of small truckers,'' he said.
Unlike most companies in the transportation industry, he added, it carries no debt on its balance sheet. And because it specializes in the food industry, he said, the company can continue growing during bad economic times. He projects annual earnings growth of 20 percent over the next three years.
The managers first bought shares in January 2000 at a split-adjusted price of $19.70. The stock closed at $28.26 on Friday; their price target is $34 within 12 months.
Photo: For their fund, Sandi L. Gleason and Robert A. Schwarzkopf buy small stocks that he calls ''the highest-quality companies in America.'' (Kim Kulish/Saba, for The New York Times) Chart: ''Kayne Anderson Rudnick Small-Mid Cap'' Category: Small growth Net assets: $69 million Inception: October 1996 Managers: Robert A. Schwarzkopf and Sandi L. Gleason Minimum purchase: $2,000 ($1,000 I.R.A.) Portfolio turnover: 50% 3-year annualized return through Thursday: 14.8% Category average: 10.4% SECTOR BREAKDOWN Financial services: 11% Other: 57% Banks: 10% Computers: 9% Medical information systems: 7% Drugs/hospital supplies: 6% FEES Front-end load: None Deferred load: None 12b-1 fee: None Expense ratio: 1.29% (Sources: Morningstar Inc.; company reports)
http://www.nytimes.com/2001/06/17/business/investing-with-robert-schwarzkopf-sandi-l-gleason-kayne-anderson-rudnick-small.html
By CAROLE GOULD
Published: Sunday, June 17, 2001
AMERICA'S biggest blue-chip companies were once small businesses -- the kind that Robert A. Schwarzkopf and Sandi L. Gleason want for their $69.2 million Kayne Anderson Rudnick Small-Mid Cap fund.
''In an industry where most people classify themselves as growth or value investors, we decided to take another road,'' Mr. Schwarzkopf said from their offices in Century City in Los Angeles. ''We don't buy the cheapest stocks or the fastest-growing businesses. We buy the highest-quality companies in America.''
The companies' returns have been substantial. The fund rose 30.4 percent in the 12 months ended Thursday, compared with a 15.4 percent loss for the small-cap growth group and a 16.1 percent loss for the Standard & Poor's 500-stock index. For the three years ended Thursday, the fund gained 14.8 percent a year, on average, versus 10.4 percent for its group and 4.9 percent for the S.& P.
Mr. Schwarzkopf, 52, and Ms. Gleason, 36, also manage $2 billion for institutions and individuals for Kayne Anderson Rudnick Investment Management, the fund's adviser.
To find businesses with sustainable competitive advantages, the managers screen 8,000 United States companies for consistent earnings and revenue growth. They look for growth rates that have exceeded the industry average over 10 years.
The portfolio companies have a weighted average market capitalization of $2 billion, comparable to that of the benchmark Russell 2500 index.
The analysts look for rising free cash flow and low debt levels. ''Companies that have lots of cash and little debt are less financially risky,'' Mr. Schwarzkopf said, ''and they can take advantage of opportunities during difficult times, when other companies are struggling.''
The managers trim the pool to 250 companies by eliminating those whose management does not seem focused on building shareholder value, and those that do not dominate their markets. Further research helps them choose the 25 to 35 stocks in the fund. ''We want to find the best businesses, understand what makes them great so we can assess how long they will stay great companies, and determine how much we should pay for them,'' Mr. Schwarzkopf said.
The managers work with sector analysts and visit the companies. ''We want to understand how a company differentiates itself from competition,'' Ms. Gleason said, ''how it creates value for customers, and how it does that in a way that excludes competition.''
To reduce risk, they aim for a diversified portfolio that roughly replicates the Russell 2500 index.
They call their strategy ''quality at a reasonable price.'' The managers prefer companies with above-average return on equity and profit margins, but with below-average valuations based on price-to-sales and price-to-book ratios. Those correlations ''give you a good sense of how your company is valued relative to its industry,'' Ms. Gleason said.
They also review ranges of price-to-earnings multiples over 5 or 10 years. ''You get a P/E band range around which the stock trades,'' Ms. Gleason said. ''You can apply the high and low multiple to target earnings for each of five years to get a target price.''
They trim positions in stocks that reach their target price, and companies whose market capitalization grows too large or that cannot sustain their target growth rates.
IN March, the managers bought shares of the Black Box Corporation of Lawrence, Pa., at $43.42. Black Box, a global marketer of cable, networking and other communications equipment, has carved out a market niche by basing its selling primarily on service, not price, Mr. Schwarzkopf said. It offers technical service 365 days a year in 132 countries. In its last fiscal year, 99.2 percent of calls were answered within 20 seconds, according to the company.
The strategy has let Black Box generate double-digit net profit margins, he said, adding that it avoids economic cycles because it concentrates on the aftermarket, not infrastructure building. He expects 20 percent annual growth in earnings over the next three years.
On Friday, the stock closed at $62.94, compared with their 12-month target price of $75.
Another favorite is the Catalina Marketing Corporation of St. Petersburg, Fla., a leader in customized electronic coupons generated at checkout counters. The company's systems are used in about 15,000 supermarkets, she added, and it has annual and multiyear contracts with major consumer goods companies. It is also expanding into health care advertising linked to drug purchases. She expects earnings per share to grow 22 percent in each of the next three years.
The fund bought shares in March 2000 at a split-adjusted price of $30.14; they now trade at $31.68, compared with the managers' price target of $49.
The managers also like C. H. Robinson Worldwide, a transportation company based in Eden Prairie, Minn. The company dominates a domestic market, Mr. Schwarzkopf said, by using its data processing systems to match small local trucking companies with the needs of large packaged-goods companies.
''They serve as a marketing and information technology department for thousands of small truckers,'' he said.
Unlike most companies in the transportation industry, he added, it carries no debt on its balance sheet. And because it specializes in the food industry, he said, the company can continue growing during bad economic times. He projects annual earnings growth of 20 percent over the next three years.
The managers first bought shares in January 2000 at a split-adjusted price of $19.70. The stock closed at $28.26 on Friday; their price target is $34 within 12 months.
Photo: For their fund, Sandi L. Gleason and Robert A. Schwarzkopf buy small stocks that he calls ''the highest-quality companies in America.'' (Kim Kulish/Saba, for The New York Times) Chart: ''Kayne Anderson Rudnick Small-Mid Cap'' Category: Small growth Net assets: $69 million Inception: October 1996 Managers: Robert A. Schwarzkopf and Sandi L. Gleason Minimum purchase: $2,000 ($1,000 I.R.A.) Portfolio turnover: 50% 3-year annualized return through Thursday: 14.8% Category average: 10.4% SECTOR BREAKDOWN Financial services: 11% Other: 57% Banks: 10% Computers: 9% Medical information systems: 7% Drugs/hospital supplies: 6% FEES Front-end load: None Deferred load: None 12b-1 fee: None Expense ratio: 1.29% (Sources: Morningstar Inc.; company reports)
http://www.nytimes.com/2001/06/17/business/investing-with-robert-schwarzkopf-sandi-l-gleason-kayne-anderson-rudnick-small.html
Monday 10 August 2009
The importance of buying good companies.
Warren Buffett, despite his prowess, required 20 years to recognize how important it was to buy good businesses.
Warren Buffett and Charlie Munger do not see many fundamental differences between the purchase of those companies that ended up in their control (controlled company) and the purchase of shares of other holdings in the market (marketable security).
Warren Buffett, despite his prowess, required 20 years to recognize how important it was to buy good businesses. In the interim, he searched for "bargains" (true to the teaching of his teacher, Benjamin Graham) - and had the "misfortune" to find some.
"My punishment was an education in the economics of short-line farm implement manufacturers, third-place department stores, and New England textile manufacturers."
Warren Buffett and Charlie Munger may misread the fundamental economics of a business. When that happens, they will encounter problems whether that business is a wholly-owned subsidiary or a marketable security, although it is usually far easier to exit from the latter. (Indeed, businesses can be misread. Witness the European reporter, who, after being sent to this country to profile Andrew Carnegie, cabled his editor, "My God, you'll never believe the sort of money there is in running libraries.")
In making both control purchases and stock purchases, they try to buy not only good businesses, but ones run by high-grade, talented and likeable managers. If they make a mistake about the managers they link up with, the controlled company offers a certain advantage because they have the power to effect change. In practice, however, this advantage is somewhat illusory. Management changes, like marital changes, are painful, time-consuming and chancy.
"In any event, at our three marketable-but-permanent holdings this point is moot: With Tom Murphy and and Dan Burke at Cap Cities, Bill Synder and Lou Simpson at GEICO, and Kay Graham and Dick Simmons at The Washington Post, we simply couldn't be in better hands."
Warren Buffett and Charlie Munger do not see many fundamental differences between the purchase of those companies that ended up in their control (controlled company) and the purchase of shares of other holdings in the market (marketable security).
- In each case, they try to buy into businesses with favourable long-term economics.
- Their goal is to find an outstanding business at a sensible price, not a mediocre business at a bargain price.
Warren Buffett, despite his prowess, required 20 years to recognize how important it was to buy good businesses. In the interim, he searched for "bargains" (true to the teaching of his teacher, Benjamin Graham) - and had the "misfortune" to find some.
"My punishment was an education in the economics of short-line farm implement manufacturers, third-place department stores, and New England textile manufacturers."
Warren Buffett and Charlie Munger may misread the fundamental economics of a business. When that happens, they will encounter problems whether that business is a wholly-owned subsidiary or a marketable security, although it is usually far easier to exit from the latter. (Indeed, businesses can be misread. Witness the European reporter, who, after being sent to this country to profile Andrew Carnegie, cabled his editor, "My God, you'll never believe the sort of money there is in running libraries.")
In making both control purchases and stock purchases, they try to buy not only good businesses, but ones run by high-grade, talented and likeable managers. If they make a mistake about the managers they link up with, the controlled company offers a certain advantage because they have the power to effect change. In practice, however, this advantage is somewhat illusory. Management changes, like marital changes, are painful, time-consuming and chancy.
"In any event, at our three marketable-but-permanent holdings this point is moot: With Tom Murphy and and Dan Burke at Cap Cities, Bill Synder and Lou Simpson at GEICO, and Kay Graham and Dick Simmons at The Washington Post, we simply couldn't be in better hands."
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