It’s too easy to become wed to one particular philosophy, instead of remaining open to reason wherever it comes from. Even though the words value investing are plastered all over this site, I can’t afford to ignore a good idea simply because it comes dressed in the garb of another investing school. Being a value investor is about remaining true to a few core principles; it isn’t about adhering to dogma.
That’s why I’ll often mention Phil Fisher right there along with Benjamin Graham. Pretending the two are separated by an unbridgeable chasm won’t do you any good. There is value in both men’s writings. Likewise, there is value in a few of the best ideas of growth investing. Just don’t compromise on those core principles when you look to broaden your horizons.…
On blogs – not only are they private thinkpads, but public ones. Someday years from now, someone’s gonna look at these blogs, where we (some of us, anyway) go out on a limb, and either say “what a genius” or “what was HE smoking.” I know that I look back on what I’ve written, here and in other places, and try to learn from my incorrect assertions and appreciate my correct ones. If my ideas prove to be successful – the blog may make a heck of a resume. If not, well, I should keep my day job.
This is exactly right. I know you may want more in the way of stock picks, but that isn’t what this blog is about. I’m never going to be able to do some sort of “lighting round” here; nor, would any such segment be of use to you. I like to have good reasons for making any assertion. I also like to make them once and make them for the long run. So, when I said I thought SAFM was the better buy than PPC, you can and should hold me to that. When, on my podcast, I said I thought it was a good bet CRFT and VLGEA would outperform the market, I meant it. If I end up being wrong about those things, tell me. We’ll go over my mistake. Think of it as an autopsy. We’ll determine the cause of my error, and look to prevent it from creeping into our thinking in the future. When I decided I wanted to create this site, the first thing I did was scribble down a real simple “mission statement” in my notebook: Help you become a better investor.
Learning from my mistakes will help you become a better investor, so however unpleasant it may be for me, it’s a necessary part of this project. Don’t let me get away with anything. I don’t want this to be the kind of place where something is said and then just allowed to drift off into the ether of web. A long term investor needs a long memory.
You can win a copy of Benjamin Graham’s “Security Analysis” (1940 edition)
All you have to do is:
Pick the public company you think has the widest moat and leave a voice mail with your name, the name of the company you’ve picked, and a brief explanation of why you picked that company at: 1 – 800 – 782 – 1687
(You can pick up to two companies. If you do, leave two separate voice mails, one pick per message)
I will randomly pair off all the voice mail picks and put one pair into each upcoming podcast. Listeners will vote (via email) for the one with the widest moat from each pair. The pick with the fewest votes will be eliminated. This process will continue until only one company is left. Listeners will include a brief explanation for their vote with each email. The listener who sends in the most interesting email will also win a copy of Ben Graham’s “Security Analysis”.
I know many of you are looking for concrete analysis on blogs like this. Unfortunately, I don’t have time to discuss every interesting stock in detail. Over the next few weeks, I do hope to include some more detailed discussions of specific stocks that interest me. Even then, however, I won’t be able to touch on every stock worth talking about. So, I decided to put up a list of stocks that interest me. This isn’t an exhaustive list by any stretch of the imagination. It is, however, a starting point. Please comment on both the list and the specific stocks on it; everyone benefits from such comments and the discussions they trigger.
The similarities between these stocks are attributable to their perceived investment value. So, you will see a lot of stocks with low price to earnings ratios and/or high historical returns on capital. This isn’t the result of any one screen. It is a composite list drawn from several different pages in a notebook I carry around with me. Today, I flipped through that notebook and took thirty of the most interesting ticker symbols scribbled in the margins and put them on this list. This explains why the list isn’t in alphabetical order; I just recorded them as I came upon them within the notebook.
Like I said, it’s not an exhaustive list, but I hope it has some value as a starting point. The only requirement to make the list is to be an interesting company selling at an interesting price. As you know, I never own this many stocks. I’m also always looking at far more than thirty stocks. So, take this list for what it’s worth:
Okay, so maybe it hasn’t quite risen to those proportions yet. But, if you’ve been reading this blog, or Shai’s blog, or the Value Discipline blog, you know there has been an ongoing debate about two chicken stocks: Sanderson Farms (SAFM) and Pilgrim’s Pride (PPC).
Now that would have been the end of it, but there was a comment made to the post ran on Shai’s site that prompted a post from Shai on blogging and investing. It’s a good post and an interesting topic, so I do encourage you to read it (for both posts on Shai’s site, the comments are worth reading as well). However, it really doesn’t have to do with The Great Chicken Debate.
It’s the comment itself that’s most relevant to this topic. In it, the author says a few words about Pilgrim’s Pride. Upon reading the comment, I decided I had no other choice but to take another look at PPC and SAFM (after all, maybe I was wrong). Well, I did take another good look at both companies, and decided I wasn’t wrong. So, I wrote a response to that effect.
The best part of all this was that it lead me to read some posts on Value Discipline, a blog which I am ashamed to say I was not familiar with. It’s a great blog; we need more like it. Of course, if you’ve been reading my blog, you already know that, because on January 5th, I posted a quick note mentioning this great blog and two posts about these chicken stocks.
I especially want you to note Rick’s use of the free cash flow margin (free cash flow as a percent of sales); this is an important metric, and one I have not yet discussed. It is of less utility over short periods of time and in commodity businesses. Well, that’s not exactly true. I should say it is of less utility in commodity businesses during a period of abnormal business conditions. However, it is an excellent number to use in comparing two or more competitors over a period of five to ten years.
I agree with everything in the post except perhaps with one slight omission. While it is true that interest coverage at both SAFM and PPC is ample at the moment, a review of both firms’ records will show that their …
Chicken stocks were in the news yesterday as Pilgrim’s Pride warned of poor earnings. These stocks may appear cheap, but appearances can be deceiving. It is not a question of if margins will contract; it is a question of when margins will contract. Some value investors will take Pilgrim’s announcement as a buying opportunity. It may be just that.
However, I wouldn’t be buying Pilgrim’s Pride (PPC). When trouble comes, the much smaller, much more conservatively financed Sanderson Farms (SAFM) will be in the stronger position. Sanderson Farms has the better recent record when it comes to earning a good return on capital. On the other side of the scales, Sanderson Farms does trade at a higher price to sales ratio than Pilgrim’s Pride. In a business like this, price to sales can be an important number, because there is little reason to expect any one company to consistently maintain a wider profit margin than the rest of the industry.
I won’t pretend I understand this industry. I don’t. I won’t pretend I have any clue as to what these firms will earn over the next few years. I don’t. What I do know is that if I were looking at chicken stocks, I’d start with Sanderson Farms. I suggest you do the same.…
One question almost every value investor asks at some point is whether it is possible to achieve above market returns by selecting a diversified group of stocks according to some formula, rather than having to evaluate each stock from every angle. There are obvious advantages to such a formulaic approach. For the individual, the amount of time and effort spent caring for his investments would be reduced, leaving more time for him to spend on more enjoyable and fulfilling tasks. For the institution, large sums of money could be deployed without having to rely upon the investing acumen of a single talented stock picker.
Many of the proposed systems also offer the advantage of matching the inflow of investable funds with investment opportunities. An investor who follows no formula, and evaluates each stock from every angle, may often find himself holding cash. Historically, this has been a problem for some excellent stock pickers. So, there are real advantages to favoring a formulaic approach to investing if such an approach would yield returns similar to the returns a complete stock by stock analysis would yield.
Many investment writers have proposed at least one such formulaic approach during their lifetime. The most promising formulaic approaches have been articulated by three men: Benjamin Graham, David Dreman, and Joel Greenblatt. As each of these approaches appeals to logic and common sense, they are not unique to these three men. But, these are the three names with which these approaches are usually most closely associated; so, there is little need to draw upon sources beyond theirs.
Benjamin Graham wrote three books of consequence: “Security Analysis”, “The Intelligent Investor”, and “The Interpretation of Financial Statements”. Within each book, he hints at various workable approaches both in stocks and bonds; however, he is most explicit in his best known work, “The Intelligent Investor”. There, Graham discusses the purchase of shares for less than two – thirds of their net current asset value. The belief that this method would yield above market returns is supported on both empirical and logical grounds.
In fact, the NCAV strategy currently enjoys far too much support to be practicable. Public companies rarely trade below their net current asset values. This is unlikely to change in the future. Buyout firms, unconventional money managers, and vulture investors now check such excessive bouts of public pessimism by taking large or controlling stakes in troubled companies. As a result, the investing public is less likely to indulge its pessimism as feverishly as it once did; for, many cheap stocks now have the silver lining of being takeover targets. As Graham’s net current asset value method is neither workable at present, nor is likely to prove workable in the future, we must set it aside.
David Dreman is known as a contrarian investor. In his case, it is an appropriate label, because of his keen interest in behavioral finance. However, in most cases the line separating the value investor from the contrarian …
I thought I’d end this year the way everyone else is: by writing about Google (GOOG). Just Google “the year of Google” and you’ll get some sense of the hype around this stock. Of course, if you’ve ever watched Jim Cramer’s “Mad Money”, you’ve already had a heaping spoonful of said hype.
So, why is a value investing blog even mentioning a stock that’s not far from having a triple digit P/E ratio?
I count seeking businesses with a competitive advantage among the tenets of good value investing. Google has a competitive advantage. In fact, one might even say its franchise is web search. I wouldn’t say that. I mean, Google does have a franchise; but, it doesn’t have a monopoly on web search and never will. There are real problems with Google’s model that are often overlooked. It does a poor job of finding certain sites that are difficult to describe in keywords. For this reason, there may still be a market for web search in the form of specialized niche directories and in some of these “social search engines” (e.g., Stumble Upon) for many years to come.
I’m not suggesting any of these services will be as successful as Google; I’m sure they won’t be. I am simply pointing out that there is a difference between a need and the means by which that need is satisfied. Even as the dominant search player, Google will only have a franchise on the means (keyword search); it will not have a franchise on the need (finding stuff on the web). Also, Google can not, at present, rightly be called the dominant search player. There is no dominant player in search. Google is the leading search player. It is also the catalyst for many changes in search. But, it is not yet the dominant player in search the way McCormick (MKC) is the dominant U.S. spice producer.
Looking at McCormick’s franchise is actually a pretty good way of evaluating Google’s. Why do I say McCormick is the dominant player (domestically) in spice, but Google is not yet the dominant player in search?
McCormick has a 45% share of the U.S. retail spice market. Its closest competitor has a 12% market share. We may differ about exactly how the web search pie is carved up. But, I think we can agree that Google’s share of the search market is no greater than 45%, and that at least two of its competitors have a share of the market greater than 12%. So, Google’s position differs from McCormick’s in that the domestic search market is less fragmented than the domestic spice market.
The spice market is an upside down funnel. The few producers are at the top. They feed their products through three distribution paths: retail, industry, and restaurants. In each case, the shape of the upside down funnel remains intact, because the widening happens at the very end. The ultimate consumer of McCormick’s product doesn’t get to choose …
