Opportunities amid the carnage

Nathan Bell

August 8, 2011 - 12:00PM

Warren Buffett famously said, 'be greedy when others are fearful'. That's easier said than done. With the market falling 10 per cent over the past week, 'being greedy' might be the last thing on your mind.

It shouldn't be.

Cast your mind back to March 2009. When everyone was panicking back then some of the best buying opportunities in years arose amongst the turmoil.

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A flood of disappointing news has panicked investors but this sell-off is offering some equally good bargains.

The US is slipping back toward recession, Europe is following, aided by sovereign debt fears and there are genuine concerns that Chinese demand won't keep Australia's economy bubbling along.

The health of the global economy is at risk but this time, governments' ability to manage spiralling deficits and cut interest rates is greatly reduced.

While the problems are real - governments do need to rein in spending and the economy isn't recovering as hoped - in many cases share prices already reflect the bad news.

Over the past 18 months we've been advising investors to increase their cash holdings. Now is the time to deploy some of it (but not all; we may well get more opportunities down the track).

The question is where?

Avoidance strategy

Firstly, we're steering clear of the big four banks. If the economy really falters, they will be hit hard.

Better to focus on best-of-breed companies with excellent defensive qualities: stocks like CSL, QBE Insurance, Sonic Healthcare and Woolworths, all now attractively priced (although our recommendations on them differ).

For the more aggressive, less conservative investor, real value is starting to emerge in those sectors most exposed to financial markets. Macquarie Group, a very different business to what it was two years ago, currently yields 7.8 per cent after falling 21 per cent over the past fortnight.

Computershare (down 12 per cent over the past week) and some of the funds management businesses like Perpetual (down 45 per cent since October 2010) and Platinum Asset Management (down 10 per cent over the past two weeks) are also on our shopping list, as is News Corporation, already suffering from corporate scandal but plummeting a further 8 per cent over the past week.

Don't speculate

This is a challenging environment for all investors and, despite the abundance of opportunities, it's no time to be cavalier.

If you're a conservative investor, ignore speculative situations altogether. There is less reward and far more risk in buying cyclicals and speculative companies right now.

In contrast, best-of-breed companies, many of which sport attractive prices and have already found a place on our buy list, offer defensive qualities and a far gentler ride.

This is no time to be riding bareback but for the first time in a few years, I'm getting quite excited by the value on offer.

This article contains general investment advice only (under AFSL 282288).

Nathan Bell is research director of The Intelligent Investor.

For more Intelligent Investor articles click here.

Read more: http://www.brisbanetimes.com.au/business/opportunities-amid-the-carnage-20110808-1iifz.html#ixzz1URvebbzr

Humour

Three great US stocks on sale

Scott Phillips

August 3, 2011 - 1:58PM

With Aussie dollar riding high, there may never be a better time to buy American shares.

Whole bookshelves of research have been conducted to pin down the exact reasons for currency movements, with only moderate success. Broadly, the economic growth of a country and that country's interest rates (again, relative to others) are widely accepted as two of the key inputs.

Whatever the reasons, the dollar is now sitting well above parity. For many, this has the effect of making shopping and travelling overseas much more attractive. It's little wonder the growth of online retailing has been so strong.

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Just as the Australian dollar's appreciation has made buying clothes and books from overseas more attractive, the same should be said of shares. The dollar has appreciated by over 20 per cent from around $US0.90 in the space of a year. You can now buy 20 per cent more shares in a company listed on the New York Stock Exchange than you could this time last year.

Of course, that only applies if the share price is the same as it was 12 months ago. The broader point is that if today's price represents good value in US dollars, you're buying at a discount relative to that same valuation a year ago.

Buy shares like clothes – on sale

Many a value investor uses the analogy of clothes prices to explain their approach to buying shares. When the price of a shirt is reduced, you're likely to buy more, not less. While share price drops can be unnerving, they often provide an opportunity to buy great businesses 'on sale'. Rather than fearing the drop, you should be excited by the opportunity.

A cursory look at some household names on the NYSE and Nasdaq exchanges suggests that some of these companies may well be on sale.

An opportunity to buy?

Microsoft needs no introduction. The maker of the ubiquitous Windows operating system and Office productivity software as well as the must-have X-Box gaming console is trading at around the same price – in US dollars – as it was 5 years ago, while earnings per share (EPS) has grown 92 per cent. Microsoft is now selling for a price that implies little or no growth, at a price-earnings ratio of a touch over 10.

In December 2008, shares of US-based The Coca-Cola Company were trading at around US$63. Two and a half years later, they trade at a little less than 10 per cent more, despite EPS doubling since that time. Coke has a trailing P/E of only 12.6 times earnings.

Branding agency Interbrand ranked Apple as the 17th most valuable brand in the world in 2010. Unsurprisingly, given the success Apple has had with the iPod, iPhone and iPad, the share price has more than doubled in the past three years. Despite that meteoric rise, profits have grown at a faster pace – tripling in the last three completed financial years. While a price-earnings ratio of 15.7 isn't traditionally cheap, Apple's growth trajectory may well make today's price look inexpensive.

Foolish take-away

Great businesses with wonderful economics and significant competitive advantages should be at the top of every investor's watchlist. A United States-based investor has the opportunity to invest in these companies at what history may well deem undemanding multiples.

An investor with Australian dollars to deploy has the same opportunity, but with cash that today buys many more US dollars than this time last year.

Investing in shares overseas has rarely been easier for Australian investors. Many Australian and US-based brokerages offer access to US and European exchanges – just make sure you shop around for a good deal.

This article contains general investment advice only (under AFSL 400691).

Scott Phillips is The Motley Fool's feature columnist. Scott owns shares in Microsoft and Coca-Cola. The Motley Fool's purpose is to educate, amuse and enrich investors.

Read more: http://www.smh.com.au/business/three-great-us-stocks-on-sale-20110803-1iax2.html#ixzz1TwRjap00

Intelligent Investor: Six classic investing mistakes

Nathan Bell

Done well, value investing is a successful, proven, and safe way to invest.

The logic of the approach - buying an asset for less than its underlying value - is irrefutable, and the records of those that practice it are convincing.

However, an understanding of the principles of value investing isn't enough. In investing, mistakes are inevitable, and the key is to learn from them, and avoid repeating them. Here are six of the best.

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1. Focusing only on the numbers

One of the most common investing mistakes, especially for the inexperienced, is to concentrate only on a stock's financial data.

Applying a price-to-earnings ratio, a book value multiple, or a discounted cash flow analysis can provide very precise estimates of value. But that's not all there is to analysing stocks.

The big four banks, for example, all carry forecast dividend yields of about 6% to 7%, and price-to-earnings ratios of around 10 to 12. Looking at the numbers, they're closely matched.

When you consider the risks entailed by ANZ's Asian expansion and National Australia Bank's (NAB) aggressive push for market share however, suddenly the numbers don't seem to tell the whole story.

These qualitative factors are the reason we favour Commonwealth Bank and Westpac over ANZ and NAB. Before looking at the numbers, make sure you truly understand the business that's generating them.

2. Mistaking permanent declines for temporary ones

In the hunt for value, it's often necessary to buy stocks with a few fleas. When businesses hit rough patches and earnings temporarily decline, it can be a great time to buy.

This strategy led to successful 'Buy' recommendations on Cochlear at $19.04 on 18 March 2004, and Leighton Holdings at $7.83 on 11 May of the same year.

We have a positive recommendation on Aristocrat Leisure today for the same reason.

While mismanagement, a poor product line-up, the strong Aussie dollar, and cyclical headwinds are all hurting Aristocrat in the short term, we expect this business to perform well in the long run.

The risk is if its current problems aren't temporary. If Aristocrat's profits stay permanently depressed, we'll have overpaid for this business, and be guilty of having mistaken Aristocrat's structural decline for a cyclical one.

3. Buying low-quality businesses

Owning high-quality businesses over the long run is the key to successful investing.

Unfortunately, high-quality businesses are seldom cheap. Value investors therefore often end up with portfolios full of cheap but low-quality stocks, entailing greater risk, more stress, and higher stock turnover.

It's better to fill your portfolio with high-quality businesses, especially if you're patient and buy opportunistically.

4. Neglecting economic considerations

“If you spend more than 13 minutes analysing economic and market forecasts, you've wasted 10 minutes.”

Ever since uttering that sentence, legendary fund manager Peter Lynch gave value investors a free pass to ignore the economy. Or so they thought.

Lynch's advice does not mean that you can completely ignore the economy. It means that the success of your investments should never rely on specific, short-term economic forecasts.

An investment in Rio Tinto, for example, hinges largely on the continued strength of China's economy and its building and infrastructure boom. That's an economic forecast we're not willing to gamble on at current prices.

An appreciation of cycles, rather than economic predictions, should underpin your stock purchases and disposals.

5. Ignoring the market

As a value investor, a healthy scepticism of the market's wisdom is a necessity: whenever you buy something, it should be because you think the market is pricing it incorrectly.

When you're right, the rewards of ignoring the market can be enormous. The market wrote RHG Group down from $0.95 to $0.05 before our positive recommendations were vindicated.

But when you're wrong, it can be a disaster. Backing ourselves over the market explains why we were far too late in pulling the pin on Timbercorp, for example.

Share price movements should never influence your analytical process. But it is necessary to be aware of them; they can offer a timely prompt to reconsider your thinking. When you're going against the grain, make sure you know why you disagree with the market and have good reason for doing so.

6. Mistaking price and value

If you're aiming to buy stocks for less than their intrinsic value, a lower price can only mean better value, right? Wrong.

Consider Telstra, which is trading close to its lowest ever price. By that simple logic, it should be more attractive than ever. But the decline of its traditional fixed-line business means it's just not worth the high of $9.20 it hit more than a decade ago, nor the $4.80 or so it traded at in 2008.

It's tempting to anchor to previous prices but they offer no clue regarding today's value. The fact that a stock has fallen does not in itself make it cheap; only the difference between its intrinsic value and the price at which it trades does.

Avoiding these classic value investing mistakes will do wonders for your returns. Use this six-point checklist to sift out these mistakes in your own portfolio.

http://www.smh.com.au/business/six-classic-investing-mistakes-20110802-1i98f.html

Warren Buffett Speaks

http://www.scribd.com/doc/54489103/95/Berkshire-Hathaway-Share-Price

Margin of Safety

The margin of safety

Benjamin GrahamOctober 2nd, 2008

The genius investor Warren Buffett once called it “buying one dollar for 70 cent”, the Margin of safety which was developed by the brilliant man Benjamin Graham in 1934. The precept of the margin of safety is very logic and works as follows.

Most people believe that the stock markets are rational, so that the stock-rate always reflects the actual value of a company. But that´s not true , you can prove that very easily. We you look back to the big ups and downs in times of a market crash. It´s definitely not logical that a company looses 60 % of its value and wins 120 % back in a short period of 2 years while the earnings constantly grow by 5 %. So we can conclude that the markets are irrational because sometimes the people become too afraid and sell very cheap stocks and sometimes they are just too optimistic and buy too expensive stocks. It´s not very intelligent but most people like to follow the herd.

But now, let´s get back to the margin of safety. If you know that the stock markets are irrational then why don´t make profit of it? First you look for very unpopular “cheap” stocks, the market capitalisation has to be far below the intrinsic value. That could be companies in trouble, after they reported bad news or complete industries with problems.

Now you calculate the value of the company in order to do that you can use different methods. 1. The Earning-capacity value 2. The Net asset value3. The liquidation value. So for example, if you calculated that the intrinsic value of a company has the value of 100 Million USD, but the market capitalisation just lies at 70 Million USD, you get a margin of safety of 30% or 30 Million USD. You buy this stock and when the market capitalisation achieves the intrinsic value again you sell it.

Note: The margin of safety has not to be exactly 30 percent, but the higher it is the safer is the investment.

http://www.pearl-invest.net/benjamin-graham/ben-grahams-margin-of-safety/

Time horizon and Compounding ("Give me back my Youth!"

Cashflow Quadrant of Rich Dad, Poor Dad - Robert Kiyosaki

Compounding

Asset Allocation

UP or DOWN

Price versus Value

Grow your networth.

The RATIONAL view versus the STORY view.

Buy and Hold (Return vs Risk)

Rule of 72

In less than 4 years, your initialinvestment has doubled in value!

Hong Leong Bhd : Compelling mid-cap exposure buy

Hong Leong Bhd : Compelling mid-cap exposure buy

From AmResearch

June 29, 2011

JUNE 29 — We maintain our BUY rating on Hong Leong Bank Bhd (HLBB), with an upgraded fair value of RM15.30/share (previously RM14.70/share). This is based on an  adjusted (for rights) ROE of 16.2 per cent for FY12F, leading to a fair P/BV of 2.4x. HLBB has now provided further details of the revenue synergies arising from the merger with EON Cap.

The first would be the potential revenue synergies from its much stronger position in credit cards. We estimate that the merged entity’s market share will jump to 13.7 per cent, from HLBB’s current 8.2 per cent. Secondly, HLBB envisages better forex and treasury fees arising from a larger SME customer base. HLBB’s total loans from SMEs currently make up about 9 per cent of its overall total loan base, but this will rise to 14 per cent of the merged entity’s overall loans.

The other revenue synergies that have been identified are related to cross-selling and other opportunities to fill selected market gaps in terms of branch network. HLBB also intends to raise transactional and payments systems fees over a larger customer base, as well as expand its priority banking services platform.

Besides adding earnings for EON Cap, our forecasts are now adjusted for three main items. Even with these adjustments, we derive an adjusted ROE of 16.2 per cent FY12F. We believe HLBB is now positioned as a compelling mid-cap banking stock, with a meaningful exposure to China.

Key catalysts for HLBB are: (a) stronger-than-expected top line growth; (b) sustained asset quality, (c) better-than-expected contribution from Bank of Chengdu, and (c) a seamless integration of its merger with EON Cap.

* These recommendations are solely the opinion of the respective research firms and not endorsed by The Malaysian Insider. The Malaysian Insider shall not be liable for any loss arising from any investment based on any recommendation, forecast or other information contained here.

Safety of Capital. Rule No. 1: Do not lose your Money

 

Be fearful when others are greedy and Greedy when others are fearful.

Warren Buffett's Quotes

Asset Allocation and Diversification

Visual Analysis of Sales, PTP and EPS lines in Take Stock (Ellis Traub).

It might make it easier if you consider the Visual Analysis one piece at a time.

Does the Sales line look straight? That means Sales growth is pretty consistent; usually what we'd prefer to see.

Is the Sales line getting steeper recently? That indicates more rapid Sales growth, but is unusual. Generally Sales growth slows as a company gets older and bigger. If there is a sudden large upward "jag" in Sales that often indicates a large acquisition. A large acquisition is a situation that tends to make the rest of the Visual Analysis harder to interpret and the future harder to project.

Is the Sales line getting less steep recently? That indicates slowing Sales growth. Slowing Sales growth is "normal" as a company gets larger. However, as an investor, too much slowing that persists over time is not a good sign. BBBY is a classic example of this.

The gap between the PTP and Sales lines shows exactly the same thing as SSG section 2A (pre-tax profit margins). If the gap changes enough that you notice it on the Visual Analysis, then PTP margins probably changed significantly.

With Sales above PTP on the graph, a smaller gap is the same thing as higher PTP margins, which is a good thing. More of every dollar of Sales is being kept as profit (less of every dollar of Sales is being spent on expenses). A larger gap is the same as lower PTP margins (not so good).

Variation in PTP margins is normal so look for a trend. Seeing changes in PTP margins before they show up on the Visual Analysis or SSG section 2A is perhaps the primary reason for looking at PERT-A. Remember that PERT-A tells you the same story as the Visual Analysis, just from a different point of view. If you think they're telling different stories, you're reading at least one of them wrong (or there is a data error).

The gap between the EPS and PTP lines shows the combined effect of changes in tax rate and shares. Anything that changes the size of this gap is unsustainable. If the gap changes enough that you notice it on the Visual Analysis, the underlying change (taxes and/or shares and/or other things) is probably significant. So, if the EPS line is getting steeper but the PTP line isn't following suit, don't expect that situation to continue. Without further investigation, It's generally not possible to know just what things caused a change in the size of this gap (and just how good or bad those things might be).

Remember that when the Sales line changes direction (i.e., isn't straight), the PTP and EPS lines generally also change direction in about the same way. If they don't, that's a warning that you should investigate the cause. If the gap between Sales and PTP lines changes noticably, investigate why PTP margins changed. If the gap between PTP and EPS lines changes noticably, investigate why taxes and/or shares (and/or something else below PTP on the income statement) changed

-Jim Thomas


----

I have an article in my BI binder from BI magazine, dated May 2006.  The title is, "Introduction to the income statement" and it is written by Ann Cuneaz.  In it, she talks about "reading the graph" from SSG section I, visual analysis.  Most people align the graphs in the same order as on an income statement: Sales on top, followed by pre-tax profit (PTP)and earnings per share (EPS). The gap between Sales and PTP represents expenses; the gap between PTP and EPS represents both taxes & number of shares.  If we only concern ourselves with graphs that have fairly straight lines for each of these three items, then we have seven different scenarios to consider: All three lines are parallel (preferably rising to the right or curving upwards to the right). This means expenses are under control and taxes & shares outstanding are holding steady.  This is an excellent situation. Sales and PTP are rising and parallel but EPS is diverging. This means expenses are under control but tax rate and/or # shares are increasing. Taxes cannot be controlled (much) so this is ok. However, an increase in shares indicates dilution and that's not good. PTP and EPS are parallel but flat; Sales are increasing.  This means profit margins are declining. This is not good. PTP and EPS are parallel and rising but Sales are flat. This means there has been an increase in efficiency (expenses are under control).  This is ok. Sales and PTP are parallel but flat; EPS is increasing. This means expenses are under control, and either or both taxes are being reduced (good) and/or # shares is being reduced. It was discussed here on the forum recently that although most people consider a share buyback to be a good thing, historically these stocks have not appreciated very well. Sales are flat, PTP is increasing, EPS is flat. This means expenses are decreasing (good) but taxes and/or shares outstanding are increasing. Again, taxes cannot be controlled and an increase in shares indicates dilution and that's not good. Sales are increasing, PTP is flat, EPS is increasing. This means expenses are increasing (not good), but taxes are declining (good) and/or # shares is decreasing (good). Bob Mann

http://community.compuserve.com/n/pfx/forum.aspx?msg=32627.1&nav=messages&webtag=ws-naic