Coca-Cola (KO) Strong Investment

The largest and most recognized beverage company in the world, Coca-Cola has put its mark on the world in a variety of ways. Coca-Cola’s name is everywhere: the World Cup, TV commercials, baseball games, and even on vending machines that sell Pepsi, its main competitor.

Marketing Strategy (Advertisements)

Coca-Cola’s marketing strategy is to associate anything that brings happiness and joy to people’s with its own brand. Just saw your team score in the World Cup? Coca-Cola conveniently pops up right afterwards just to remind you of their proud sponsorship of the event. Through this tactic Coca-Cola has become the largest beverage company in the world, and people from everywhere recognize Coca-Cola’s name and logo. Did you know Coca-Cola is the second most recognized word in the entire world (Right after “okay”)? The company spends billions in advertisements all around the world, spreading its name to everyone and making you think of it whenever you think of any event that made or makes you happy.

Loyal Consumer Base (Secret Recipe)

Immediately when someone becomes thirsty for a soda Coca-Cola springs to mind, and with such a loyal consumer base Coca-Cola’s customers will never leave its side. This can also be attributed to Coca-Cola’s “secret recipe”, a heavily guarded secret to how exactly to make Coca-Cola’s concentrate. This “secret recipe” has consumers addicted to its product. This was proven early in Coca-Cola’s history when rival Pepsi first came out. Coca-Cola immediately began to rapidly lose customers to the rival business, and management finally came to the decision to change the recipe for Coke which had remained the same ever since the company started. The reaction was immediate. Consumers were outraged. Coca-Cola was under attack from almost every direction as new reporters called it “the worst marketing blunder of the century” and consumers called and wrote to the company in deep anger. Coca-Cola was forced to revert the recipe back to the original in just a matter of months. Ironically, from then on Coca-Cola thrived while Pepsi could only watch and wonder at the power of its business.Many people back then insisted the management had changed the recipe on purpose, knowing that that would happen, but management consistently denied it and people were forced to believe that the “worst marketing blunder in history” turned out to be one of the best marketing ventures ever after just a few months. Also, Warren Buffett, a long-time and proud holder of Coca-Cola’s stock, has also said Coca-Cola has no “taste-memory”, so people will never get tired of drinking it and will keep coming back for more.

Long-Term Expansion for the Credit Industry

The credit industry is one of the best industries poised for growth in the future. Global consumer shifts into techonology-based forms of transactions leave credit card companies in the best position to profit. The four dominators of this industry (pictured above) have already seen incredibly fast and aggressive growth of their share prices.

Prospects for Growth (Developing Markets)

While mature markets like the United States and much of the European Union have already adopted credit cards as their primary forms of transactions, developing markets around the world still hold many prospects of expansion for credit companies. This ensures that large credit card companies already have a reliable consumer base for consistent earnings (developed markets), and also gives the companies lots of room for expansion (developing markets).

Business Structures (Credit and Banking)

Of the four companies in the above picture, Visa and MasterCard operate solely in the credit industry, and derive a vast majority of their profits from that industry. American Express and Discover are credit card companies, but also have banking segments of their companies that they earn money from. This added bit of diversification may prove to be useful in the future as they have something to fall back on if the credit industry takes a hit, but could also hinder their long-term growth prospects as the credit industry definitely has more growth potential ahead of it than the mature and consolidated banking industry. In the end it comes down to how well management steers the company, regardless of the industries they operate in. Also not mentioned in this blog is Capital One, a somewhat prominent credit company, although not possessing nearly as much market share in the credit industry as any of the above companies. Capitol One’s banking exposure is much larger than American Express or Discover, though, and is a likely candidate if you would prefer more a company with more banking operations than the four prominent credit companies.

Walmart (WMT) Strong Competitive Advantage

Wal-Mart is by far the largest retailer in America. The company earns approximately $470 billion in revenues every year, the highest of any U.S company.

Competitive Advantage (Slim Margins)

The company’s high revenues is counteracted by the company’s ultra-thin profit margin, a meager 3%. So, for every dollar Wal-Mart earns through operations, it only truly earns 3 cents after all deductions such as wholesale purchases, advertisements, etc. This brings its overall annual net income (money earned after all deductions to revenues) to just $16 billion. One would think that this razor-thin margin is what is restricting Wal-Mart from earning more money, but, on the contrary, it’s what gives Wal-Mart the majority of its sales. Wal-Mart constantly advertises that it sells its items for the lowest prices around; if you find a lower price they will match it for you and pay you the difference. This is only achievable by having such a slim profit margin and selling its products for just pennies above how much they bought them for. This business strategy is able to be employed by Wal-Mart the best because of the sheer size of its enterprise. Wal-Mart has such a large consumer base and span of stores that it can afford to do what other companies can’t: sell products for the cheapest possible price on the market. This strategy builds up long-term value in Wal-Mart’s company, since it ensures that people will always have a reason to shop at Wal-Mart, and not just because of consumer loyalty.

Low P/E Ratio and Defensive Company

Wal-Mart is also currently trading at a relatively low P/E of 15, and its forward P/E is only 13. The defensive nature of Wal-Mart’s company doesn’t quite add up with its current P/E ratio, as investors typically are willing to pay a premium for such companies and their predictability, so advances in the share price could be easily warranted without any real uptick in earnings. Nowadays, however, some long-term investors in Wal-Mart as citing the slowing revenue growth in the company as a reason to sell, although I believe Wal-Mart’s district competitive advantage will sustain its revenue growth into the long-term, and right now is just a temporary slowdown in an otherwise upwards trend.

Markel (MKL) Another Berkshire Hathaway Replica

Markel has seen tremendous growth throughout the years by copying the business structure of Berkshire Hathaway. They have a huge insurance arm that nearly doubled in size in 2013 with the purchase of Alterra. This expanded their investment portfolio size from just $9.3 billion to $17.6 billion.

Investing Management (Tom Gayner)

The investment portion of Markel is managed by Tom Gayner, a renowned and skilled investor. His investment style is to try to find businesses in mature sectors where there has already been much consolidation and it is hard for competitors to get in, like railroads and airlines. He also said in an interview that he tries to find the “next Berkshire Hathaway” and add it to his company’s portfolio. Ironically, or perhaps intended, he is managing investments for a company that is commonly nicknamed “baby Berkshire”. Mr.Gayner is also a long-term investor, keeping all of his top holdings for more than ten years at a time. This shows that he is both disciplined and doesn’t double-guess himself, and tries to build long-term shareholder value through his purchases, not just invest for the quarter like other institutional investors.

Markel’s Business

Markel itself as a business is also growing very fast, easily topping the S&P in five, ten, and twenty year time periods, ever since its IPO. A way Warren Buffett likes to judge the growth of his company, Berkshire Hathaway, is book value per share (the amount of money a shareholder would get per share if a company decides to liquidate). Book value itself is just the total assets of a company minus any liabilities and intangible assets. Markel has seen its book value increase by an astounding 20.1% annual rate since its IPO, This incredible growth is only matched by its copy, Berkshire Hathaway. A company that grows just as fast as one of the greatest companies in the world, has incredibly skilled and long-term oriented investment management, and is based on a business structure that has proven to be extremely lucrative in the past should definitely be in any investor’s portfolio.

Solid Long-Term Investmets (Dividend Growth Companies)

A highly acclaimed form of investing on Wall Street is Dividend Growth Investing (DGI). This form of investment refers to buying companies that have continuously grown their dividends (cash payouts to shareholders) annually without stopping for a number of years. These kinds of companies are good for two reasons: they prove that their company is financially sound since they will always have the cash flow to sustain the dividend that they give to shareholders regardless of market condition, and they ensure shareholders will recieve an increasing amount of money every year through dividends. Dividend growth companies are typically large coorperations that operate in lower-volatility industries such as the consumer goods and energy sectors. Multiple studies have proven that dividend growth companies outpreform the overall market by a wide margin over the long term, however, as many investors are probably aware, the past is very rarely a way to predict future. Nonetheless, many dividend growth companies will pay out 3% or more annually by dividends to shareholders, and with the long-term average annual return for the S&P at about 7%, having a dividend growth company earn 4% yearly on captial gains (when the stock price goes up) along with a 3% dividend would be preferable to a no dividend company earning 7% a year to match the market. My reccommendation is not to just buy every single dividend growth company out there and expect great returns; investors still need to do their own research about each of the companies they are going to buy. However, if ever in need of a solid long-term investment, investors should always consider dividend growth companies for their portfolio. Beware of when to sell dividend growth companies, however. Investors must have the emotional tolerance to not sell dividend growth companies during economic downturns, as they are long-term companies and will prosper throughout however many recessions there are. The only reason to sell a dividend growth company, if you bought it because it was a dividend growth company, is if it cuts its dividend or doesn’t increase its dividend for a year. An investor would be prudent to sell, then, since the reason they bought the company no longer exists: that it was a dividend growth company.

Here’s a list of dividend aristocrats (companies that have increased their dividends for 25 years or more consistantly).

The Current Stock Market Condition (and How to Play it)

The Current Stock Market Condition

If you watch any form of financial news you may know that market indexes are continuing to reach new highs and are showing no signs of stopping. Of course, knitted into that financial news are countless investment analyst’s opinions on where the stock market is going in a month, a year, or even a decade. However, you may begin to realize that these analysts rarely agree with each other, and bad news to one may very well be good news to another. Nowadays, many analysts arguing for the bearish case (betting that the market will fall) are citing the (moderate) overvaluation of the market, geopolitical risks in Russia, Ukraine, and the Middle East, increasing global debt, tapering of the Federal Reserve’s bond-buying program, record highs, and the longer than usual length of this bull market as reasons to sell everything. Bullish analysts (betting that the market will go up) insist that the economic recovery from 2008 is still in its infancy and has a long way to go.

How to Play it

So, who do you listen to? The bulls or the bears? How about neither? If you are a fellow individual investor in bond and equities, then I presume you wanted to invest your money yourself and not give it to someone else to invest for you. So why would you listen to these financial pundits that can’t possibly get everything right, or else they’d all be millionaires? They offer you no compensation if their predictions are wrong, and the only person to blame if you lose money following them is yourself. Here’s a bit of investment advice: do your own research and analysis of the companies you want to invest in, as well as the current stock market condition, and try not to time the market. If you honestly think a major correction is going to occur in the next year, and want to try and profit off it, just sell some equities and hold the cash for a while. The reason you shouldn’t go around shorting (earning money if an investment goes down in price) the S&P all the time is that, if you are wrong, you may never be able to cover your shorts for a profit. There is only one trend that has continued in the market for centuries, and that is that it goes up. No matter how many World Wars, depressions, recessions, and financial crisis’ there are, the generic trend of the market is up. So if you’ve done your own research and you truly, truly think the market is in for a correction, then sell some of your more cyclical or volatile holdings and hold the cash to buy in at the bottom of the correction. If you’ve done your own research and you think the economic uptrend isn’t going to end anytime soon, then feel free to leave your money in stocks. If you didn’t do your own research because you’re too lazy or you think its too much work, that’s fine too. You can still just leave your money in some strong long-term companies and hold them forever. If they are truly strong long-term companies, then they should live and prosper throughout the years.

Fairfax Financial Holdings (OTC: FRFHF) The Next Berkshire Hathaway?

A small Canadian financial holdings company, Fairfax is my top canidate for the next Berkshire Hathaway (for those that don’t know, Berkshire Hathaway is the massive conglomerate made by Warren Buffett, widely considered to be the greatest investor ever. To give a scope of how successful the Berkshire Hathaway was, $100 invested into it at its initial public offering (IPO) in 1980, would be worth $73,000 now, compared to $1400 for the S&P 500 market index).

Business Structure (Insurance Base)

Firstly, the structure of Fairfax is very similar to Berkshire Hathaway. It is made up of a massive insurance arm that stretches all around the world. This is important for an investment company, as insurance gives you the money to invest. Considered simply, insurance is basically people giving you money for free, with a limited chance that you might need to pay them back in the future. Warren Buffett and Prem Watsa (the CEO of Fairfax) take advantage of the time gap in between to invest the money given to them, then give a small amount of the earnings back to the payer in case he or she gets into an accident.

Management (Prem Watsa)

The second similarity between Fairfax and Berkshire Hathaway is excellent management. Prem Watsa is the CEO of Farifax and manages all of the company’s investments. To give an example of his brilliance, Watsa successfully predicted the global crash of 2008 and hedged all of Fairfax’s holdings, earning huge while global economies fell to chaos. He focuses on value investments, like Warren Buffett, but also tries to time the market when he thinks a global crash is coming, something Warren Buffett and other big investors warn against doing, although Prem Watsa seems to be able to do it relativly well, especially during 2008. During economic uptrends his value-oriented investment strategy has also earned him the nickname “Warren Buffett of Canada”, which I believe is more than fitting. Fairfax is still in its infancy and lacks the monetary power to buyout other companies as investments, so instead Watsa operates a large stock portfolio comprised of the company’s money. For now his investments are not quite up to par, since he believes a global crash is about to occur because of extremely high amounts of debt, and therefore is betting very selectively on odd investments and contrarian picks, such as Blackberry. His portfolio is yet again fully hedged against a market crash, although it is necessary to say that it has been hedged since 2011, and global catastrophe has yet to strike. Nonetheless, I feel confident in Prem Watsa’s ability to choose value investments and predict market crashes, and I also think the business structure of Fairfax is extremely well done and almost identical to Berkshire Hathaway, giving it much oppurtunity to grow if it is managed right.

Gazprom (OTC: OGZPY) Undervalued

Undervaluation Reasoning

The biggest company in Russia and the largest natural gas provider in the world, Gazprom is incredibly undervalued. The underlying argument for this declaration is that the p/e ratio of the company is only 2, meaning that the company’s market cap is only two times its net yearly earnings. Last year Gazprom earned 36 billion in net income (money earned after all deductions to revenues), compared to just 32 billion by Exxon Mobil (XOM), the largest oil company by market cap in the world. The difference between Gazprom and Exxon Mobil, however, is that Gazprom’s market cap is just 87 billion, while Exxon Mobil’s market cap is a whopping 443 billion dollars (for an explanation on market cap refer to the previous post). Strictly by numbers, Gazprom’s market cap should be well over Exxon Mobil’s since its profits are higher, which would represent over a 400% increase in share price.

Company Negatives

This growth, however, would not be realistic. Exxon Mobil is a well-managed, shareholder-friendly company that operates in the largest economy in the world, whereas Gazprom’s management couldn’t care less about shareholders and doesn’t make moves for shareholder’s benefits. These factors significantly reduce Gazprom’s valuation, but definitely not to the extent that they are worth 80% less than a company that they earn more profits than, Exxon Mobil. The current situation in Russia, regarding the annexation of Crimea, also plays into this valuation, although it does more good than bad. Geopolitical risks like Crimea will die out eventually, but they drive share prices down in the short term. This gives an excellent entry point for long term investors, however, short term traders could find the extreme amount of volatility until the matter is resolved to be quite hard to tolerate. How long you are willing to hold Gazprom, as well as how long you think it will take for Gazprom’s true value to be spelled out by the share price will determine whether or not to buy the company.

A Short Explanation of Market Cap

This explanation of what market cap is will help readers of my blog figure out what most of my undervalued plays are and why they are undervalued. Market cap is a basic valuation of a company used to determine what a company is worth. Market cap equals share price * shares outstanding. Share price is simply the cost of a stock’s shares, while shares outstanding is the total amount of shares of a stock out on the market. Therefore, there are two ways of changing a company’s market cap: increasing or decreasing the share price of the company, which happens to a company every trading day, or increasing or decreasing the shares outstanding of a company. Companies rarely increase their shares outstanding by issuing out new stock, but will often buy back their own stock if they have extra cash on hand. In a share buyback program, a company will take a specified amount of money and buy their own stock on the market in a specified amount of days. This is meant to decrease the shares outstanding and increase the earnings per share (EPS) number, so that for every dollar a company earns, you earn a bit more than you did before. When I call a company undervalued on my blog,  I am predicting that the market cap of a company will increase, that is, the value of the company will go higher, because the share price will increase.  Therefore, if a company has a market cap of 10 billion and it is undervalued by 5 billion, the share price is expected to move 50% higher in order to increase the market cap to 15 billion.

Wells Fargo (WFC) Business Structure

Simplistic Business Structure

Wells Fargo is the only big bank that operates only in the commercial banking industry. The others, JPMorgan, Bank of America, and Citigroup, all have activities in investment banking and well as commercial banking. This is a strong competitive advantage for Wells Fargo, however, as its business strategy is much more simplistic than the other big banks. This allows for a more focused company as well as less mistakes by management. In contrast, more complex business strategies like the ones adopted by JPMorgan and Bank of America can easily lead to catastrophic problems like the ones highlighted in the 2008 financial crisis, where Bank of America and Citigroup had to be bailed out by the government, and JPMorgan stayed afloat simply because of fast-acting and smart management. Wells Fargo, however, escaped unscathed and even earned profits during the worst economic meltdown since the Great Depression. JPMorgan also was profitable during that time, but its complex business structure still restricted share price growth since 2000, since it tumbled much more than Wells Fargo on any sort of economic worry. Investment banking gives companies more exposure to macroeconomic weaknesses such as the euro zone crisis in 2011, where banks that compete in investment banking saw over 30% drops in stock price, while Wells Fargo and market indexes only fell about 10% from highs. Also, ever since the massive financial crash in 2008, and through the European recession in 2011, Wells Fargo has remained the fastest asset grower of all the big banks regardless of the fact that it misses out in the investment banking industry that arguably brings banks more harm than good.