Value Investing System Applies to Stocks and Politicians
Value investors must determine the true worth of a company before deciding whether it is a good buy. The same philosophy can be applied to politicians, as Warren Buffet demonstrated when he backed Senator Barack Obama for president.
Editor’s Note: Today we have J. Royden Ward, editor of Cabot Benjamin Graham Value Letter, writing to us from Florida. Before we get to that I want to share a story I saw the other day that ties in nicely with what Roy is going to discuss. Enjoy! -Elyse Andrews, Editor of Cabot Wealth Advisory
Buffett Picks Another Winner?
I recently read that Warren Buffett, the world’s richest man and a follower of Benjamin Graham’s teachings, backed Senator Barack Obama for president. What effect will that have on the market?
You see ... Buffett had previously offered support to both Obama and Senator Hillary Clinton, but he said it was time to get behind Obama as it is becoming increasingly clear that the Illinois senator will win the Democratic Party’s nomination. And the fact is that the economic policies of both candidates are nearly identical.
Is this simple politics or does the Oracle of Omaha know something that we don’t?
One of the keys to Benjamin Graham’s value investment system is picking stocks with good fundamentals and intrinsic value that are undervalued in the market and selling them when they become fully valued. Fundamentals are weighed heavily in value investing, but the intrinsic value of a stock is important too.
It’s possible that Buffett is applying the same fundamental principles he learned from Graham himself to Obama.
Obama’s fundamentals might be his experience as a community organizer seeking to improve living conditions in poor neighborhoods, his views on issues and his large donation pool. His intrinsic value might be his ability to unite people and his drive for change and hope. Perhaps Buffett believes that Obama’s political stock is currently undervalued in the market and in time this will be corrected, thus leading to a great payoff.
Regardless of what happens, one thing’s for sure, Buffett has a history of picking winners.
Now on to Roy and his investing words of wisdom.
Greetings from Florida! The other day, my wife went shopping for a new pair of shorts. After four hours, she walked in the house with three huge bags filled with clothing of all description. Now I’m not complaining, but I want to let you know that the U.S. economy is alive and well. I also want to point out that when she shops, she is like all shoppers in that she searches for bargain prices. If one shoe store is having a half-off sale, she shops there first, rather than pay full price at another store.
Of course, you know where I’m going with this. I’m a value investor, which means I’m constantly looking for bargain prices in the stock market. The question is: how can we determine whether a stock is a bargain?
Today, I’d like to pass along the methodology I use to find the true worth of a company. I find the estimated value of a company by doing a few calculations with the help of my trusty computer. As a true value investor, I need to know what a company’s stock is really worth before I can determine whether it’s a bargain.
Calculating Price Targets
I download a large amount of data into my computer each month and then turn my computer loose to determine preferred buy and sell targets for my stocks. My database includes 10-year history for sales, cash flow, earnings, dividends, book value and price per share for about 1,000 companies.
The initial objective is to organize the numeric history of each company, so that future stock prices can be predicted. Calculations can be a little tricky, because anomalies such as deficits, exceptionally good or bad years, or a multitude of other variations could throw the predictions out of whack. But I’ve programmed my computer to deal with anomalies, and the resulting stock price forecasts are quite accurate.
Each month, I publish my price predictions for 250 companies in the Cabot Benjamin Graham Value Letter. I recommend that investors buy at or below my Maximum Buy Price and sell when the stock reaches my Minimum Sell Price. It’s that simple.
For instance, my stock recommendation for today is Garmin, Ltd. (NSDQ: GRMN). My computer tells me that a reasonable price for Garmin is $54.05. In other words, investors should pay no more than $54.05 for the stock during the next four weeks. The Minimum Sell Price for Garmin is $87.22, meaning investors should wait until Garmin’s stock price increases to $87.22 before selling. The target sell price will change over time, as I update the firm’s sales, earnings and other results into my computer. But like I said before--the forecasts tend to be quite accurate.
So you see, whether it’s a stock price, or a politician, each piece of the puzzle must be assigned a value before buying, or endorsing, it. Everybody wants to buy when a stock is undervalued and sell when the stock price is fully valued. But the trick is having a proven, time-tested system that helps you spot bargains, and rip-offs. It’s taken years to hone, but that’s what my system is able to do!
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Garmin, as most people know, designs, manufactures, and sells navigation and communication devices equipped with global positioning system (GPS) technology. The company’s portable and fixed-mount devices are used mainly in cars and trucks (75% of sales). GRMN spends 5% of sales on research and the development of new products-considerably more than its competitors. The company sells GPS devices in more than 100 countries.
So why is the stock so cheap?
Garmin’s first quarter earnings per share (EPS) increase of 8% was disappointing when compared with average increases of 25% per year during the last 5 years. The sudden drop in growth is attributable to higher taxes, increased advertising costs and lower product prices due to increased competition. The company is expanding into new geographic areas and is introducing a barrage of new products, including the “Nuvifone,” a cell phone with GPS, due to launch in the fall of 2008.
Garmin’s stock price plummeted during the past six months from a high of $125 to the current $50. I believe (supported by my computer) that investors’ worries about increased competition and falling prices for GPS devices are clearly overdone. The dividend yield of 2.0% and GRMN’s strong balance sheet will shore up the stock price. GRMN shares are ready to climb to my Minimum Sell Price of $87.22 within one to two years. I strongly recommend buying Garmin, Ltd. at its current price.
J. Royden Ward
Analyst and Editor of Cabot Benjamin Graham Value Letter
Editor’s Note: Garmin is featured in the latest issue of Cabot Benjamin Graham Value Letter, and updates on it (and other value stocks) will be provided in the newsletter until the stock reaches its Minimum Sell Price. In the newsletter, you will find all the tools you need for value investing, the same tools developed by Benjamin Graham and used by Warren Buffett. Click the link below to read more.