Suggested Link: Sherwin-Williams
Those interested in Sherwin-Williams (SHW) should read Value Discipline’s “Dutch Boy takes a Beating in Rhode Island (SHW)”.
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Read moreNews Item: Sherwin-Williams
Sherwin-Williams (SHW) fell 17.82% today on very high volume. Today’s trading was largely the result of a Rhode Island trial jury verdict against Sherwin-Williams and two other former makers of lead paint. A fourth defendant was found not liable. DuPont had also been named in the suit; however, last year, Rhode Island agreed to drop DuPont from the lawsuit when the company agreed to make several million dollars in payments to various government programs and non-profit organizations.
Sherwin-Williams has consistently earned high returns on equity while employing relatively little debt. Investors looking for a bargain may want to research the company and follow the lawsuit. If Sherwin-Williams’ stock price suffers a substantial decline in the weeks or months ahead, expect a blog post from me discussing the company in greater detail.…
Read moreContest: Coke Defeats SpaceDev
Voting for these two picks ended several days ago, but I didn’t have time to post the results until today.
No surprise here. Coca – Cola (KO) crushed SpaceDev (SPDV.OB) in the most recent round of widest moat contest voting. The final tally: 100% of the vote went to Coke. SpaceDev failed to garner a single vote.
Coke will advance to the final round where it will face Microsoft (MSFT) and a third wide moat company that has yet to be determined. There were some very good email votes this time around. Remember, the person who picks the company that ends up winning the wide moat contest isn’t the only one who will win a copy of Benjamin Graham’s Security Analysis. The author of the best email vote will also receive a free copy of Ben Graham’s magnum opus.
The final pair of entries will be unveiled during the next podcast.
Thank you to everyone who voted.…
Read moreStockBlogs.com
Gannon On Investing has been added to the StockBlogs directory. The directory is the best place to go to find stock market blogs. You’ll notice that several of the blogs in Gannon On Investing’s Value Investing Directory have already been included in the StockBlogs directory. There are also a few worthwhile blogs in the StockBlogs Directory that have yet to be included in GOI’s Value Investing Directory. I hope to correct that error in the weeks ahead.
Read moreThe New Wall Street Message Boards
This is just a quick note to let everyone know The New Wall Street has added message boards. I encourage you all to go over there and get some intelligent discussion going. This is your chance to create an investing community free of the sort of flippant, unthinking posts that mar so many of the major stock specific message boards. I know I’ll be over there a lot. I hope you’ll join me.
Go to The New Wall Street Message Boards…
Read moreOn the Physical Effects Fallacy
This post was prompted by something I read over at Absolutely No DooDahs. As I’ve said before, most of the commentary on Bill’s blog is highly intelligent. So, I feel bad about singling out this most unintelligent (and most unrepresentative) post. However, this myth has been around for several centuries, and has enjoyed the support of some otherwise intelligent individuals; so, it is in desperate need of dispelling.
Regarding Anheuser-Busch (BUD) and Coca-Cola (KO), Bill wrote:
Colored, flavored corn – syrup water doesn’t generate brand loyalty, and neither does fermented hops and barley malt. The desired effects of either can be gotten with off-brand products and substitutes.
This statement is false. The desired effects can not be gotten with substitutes. The demand for a product is not determined by the physical effects of that product on the user.
Most misinterpretations of economic activity begin with a failure to properly define economics as the study of human choice. If the field is further limited in scope, it can no longer explain commerce. In other words, a unified theory of economics must explain all human actions, because humans do not have one “program” for making economic choices and another “program” for making non – economic choices.
The demand for a product is derived from that product’s (expected) ultimate impact. I’m using the word “impact” simply because I want to conjure up the image of the mind as something that is being stamped or imprinted. In ancient times, the idea of the physical world “stamping” the mind was popular, and I think it’s an apt metaphor in this case.
Humans act to effect changes in their mental states; humans do not act to effect changes in their physical state. Human actions that appear to be motivated by a desire to alter one’s physical state are actually motivated by a desire to alter one’s mental state. That’s where the “ultimate” half of “ultimate impact” comes from. Alterations to one’s physical state are merely desirable insofar as they lead to alterations in one’s mental state.
Let me use a few examples. You don’t eat to prevent starvation; you eat to eradicate the sensation of hunger. You don’t take your hand off a hot stove to prevent further burning of your flesh; you take your hand off a hot stove to prevent further pain.
I’m not just splitting hairs here.
Humans are rational in the sense that they act to maximize pleasurable mental sensations and minimize painful mental sensations. They are not rational in some greater sense. For instance, humans have no inherent desire to live, they merely tend to believe living is the more pleasurable state. Some humans weigh all the pleasure and all the pain and find they’d prefer a quick exit. Many rational people have committed suicide under extreme circumstances. The fact that under normal circumstances most rational people do not contemplate suicide doesn’t necessarily mean we are hard – wired to live, it could simply …
Read moreOn Paying a Fair Price
A reader recently sent me an email about Procter & Gamble (PG); that email prompted this post.
You’ll often here people say it’s okay to pay a fair price for a great business. Don’t listen to them. An investor never pays a fair price for anything. There is nothing fair about investing. Remember, there are two sides to every trade. A good investor makes his living by ripping other people off.
That is, after all, what Ben Graham’s Mr. Market metaphor is really all about – a sane man taking advantage of a lunatic. Despite the media’s coverage of the markets, we investors are not all in the same boat together. Investing is a zero – sum game. If you want to match the market, buy an index fund. If you want to beat it, you need to forget about fair prices.
All investments are ultimately cash to cash operations. Owning a great business has no value in and of itself. So, paying a fair price for a great business means you’re giving up as much as you’re getting. There’s no logic in that.
An investor may be wise to buy a great business at a higher price – to – earnings multiple than he is willing to pay for most businesses. But, that isn’t the same thing as paying a fair price. If your intrinsic value analysis shows a stock is currently trading at or above its true value, don’t buy it. It’s really that simple.
Performing an intrinsic value analysis is nothing like slapping a P/E multiple on a stock. A great business may justifiably command a higher price – to – earnings ratio, because of its growth factor. Let me reprint here what I had written in the Value Investing Encyclopedia about a company’s growth factor, because I’m sure many of you haven’t seen it.
A business’ growth factor consists of two parts: the return on capital and the amount of unrealized growth within the franchise. The former governs profitability; the later governs growth.
Only a company that earns an extraordinary return on capital and can deploy additional capital within the franchise can be said to have a truly profitable growth factor. If a business’ return on capital is less than or equal to the average return on capital in the economy, then it does not have a positive growth factor regardless of its earnings growth rate. A company with a very high return on capital and no room left to deploy capital within the franchise will likewise not have a positive growth factor.
I hope to address the issue of just how valuable growth can be in my next post. I’ve only hinted at this before. For instance, I wrote that at a price of just over twenty times earnings, PetMed Express (PETS) was clearly a bargain. My intrinsic value analysis showed it was very cheap. Still, I didn’t buy it. That was a dumb mistake caused by relying on the crutch …
Read moreCoke vs. Space Dev
You can win a copy of Benjamin Graham’s “Security Analysis” (1940 edition)
Please send in your email votes for the latest pair of wide moat picks. The two companies mentioned in the Gannon on Investing Podcast: “Phil Fisher” were Coca – Cola (KO) and Space Dev (SPDV). The voting will close Sunday at 11:59 p.m. (eastern).
Remember, the author of the best email of the entire contest will win a copy of Benjamin Graham’s Security Analysis (1940 ed.).
Please note: I have not confirmed the ticker symbol for Space Dev. Always double check the ticker symbols I use. They are included primarily to facilitate searches of the blog using the search box on the sidebar to the right.…
Read moreOn Return on Assets
Despite all appearances to the contrary, this is a post about investing – not baseball. So, to those of you who love reading about investing but hate reading about baseball: don’t be deterred. It’s worth reading all the way through.
Return on assets is the hit by pitch of investing. Common sense suggests it isn’t a very important measure. Why would any investor care about return on assets when return on equity and return on capital tell you so much more?
You don’t have to know a lot about baseball to know that the number of times a batter is hit by a pitch shouldn’t tell you much about his value to the team. After all, getting hit by a pitch is a fairly rare occurrence. Even if some players are truly talented when it comes to getting plunked, they still won’t get hit enough to make a huge difference, right?
That’s true. In and of itself, the act of getting hit by a pitch is not particularly productive. But (and here’s where things get interesting), as a general rule, a simple screen for the batters who get hit most often will yield a list of good, underrated players.
Why? The most likely explanation is that a hit by pitch (HBP) screen returns a list of players who are similar in other, more important ways. Perhaps batters who get hit more often also tend to walk, double, homer, and fly out more often – while grounding into double plays less often. Even a casual baseball fan might suspect this.
Since this blog is about investing rather than baseball, there’s no reason for me to discuss whether such a correlation really does exist. I’ll just provide a list of the top ten active leaders for HBP: Craig Biggio, Jason Kendall, Fernando Vina, Carlos Delgado, Larry Walker, Jeff Bagwell, Gary Sheffield, Damion Easley, Jason Giambi, and Jeff Kent.
After the top ten, the list is no less impressive. #11 – 15 are: Derek Jeter, Luis Gonzalez, Alex Rodriguez, Matt Lawton, and Barry Bonds. Since this list is based on career totals for active players, it’s biased towards players who remain in the majors and who get a lot of plate appearances. That fact alone means the guys on this list are likely going to be above average players. However, even if you look at the single season HBP list, which includes a few young players (e.g., Jonny Gomes), the guys with high HBP totals still tend to be extraordinarily productive offensively.
Simply put, screening for HBP tends to return a much higher number of “bargain” batters than you’d expect. One explanation for this is that the good things players with high HBP totals do tend to be less conspicuous than the good things other players tend to do.
Might there be a parallel in the world of investing? You bet. So, again I say –
Return on assets is the hit by pitch of investing.
Return on assets is a …
Read moreOn the Value Investing Encyclopedia
I have been slowly adding to the Value Investing Encyclopedia. A new encyclopedia entry for Joel Greenblatt has just been added. It is difficult for me to provide complete and accurate entries on my own. If you have any information relating to any subject within the encyclopedia, please let me know.
For instance, in the entry for Joel Greenblatt, I was unable to include an accurate date of birth. For now, I have listed his date of birth as 1958? to provide some idea of his age. If you know when Mr. Greenblatt was born, please comment below or email me. Likewise, if you have reason to believe there are any inaccuracies or omissions in the entry, please let me know.
I hope the Value Investing Encyclopedia will become a useful resource in time. Any help you can offer will be greatly appreciated.
Read the Value Investing Encyclopedia Entry for Joel Greenblatt…
Read more