Micron (MU) High Growth Prospects

Micron specializes in making DRAM chips and NAND products, and occupies a dominant portion of those fast growing industries. The company is well known now for its 500% gains from just 2 years ago. However, intimidating as it is to buy into such a stock now, I believe Micron still has substantial growth ahead of it.

Large Barriers to Entry

Almost all of Micron’s ability to grow lies in the maintaining of its semiconductor chip industry power. PC sales growth as well as the common popularity of iPhones has allowed Micron to rack up substantial gains, considering its dominant place in the industry that supplies the chips for these electronics.  Naturally, however, the company would also be at a great risk if other corporations were to invade the industry, stealing away precious market share from Micron. That would be very unlikely to happen, however, as there are various barriers to entry in the semiconductor chip market: advanced technology and skilled workers are necessary for the production of semiconductor chips, initial investments for getting into the industry are high, and Micron already has the rights to thousands of patents that they made to protect their products.

Low Current Valuation

The current valuation reflect a lot of fear baked into a company that is quite unjustified. A trailing P/E ratio of 13 and a forward P/E ratio of just 8 are both well below the market’s, which makes little sense, as Micron has already demonstrated its exceptional ability to grow, and there is no foreseeable headwind for the company in the future. These valuations most likely reflect the fear of newcomers to the semiconductor chip market that would thereby cause Micron to lose market share, but the point against that scenario was already made in the previous paragraph. Micron’s valuation is exceptionally low for such a fast growing company, and therefore provides investors with a large margin of safety for buying into a high growth stock.

Hedge Fund Investors

Large hedge funds absolutely adore Micron as a stock; David Einhorn and Seth Klarman lead the pack with Micron as their largest holdings (19% and 34% of their total portfolios, respectively). Also, over 20 of the world’s largest hedge funds own Micron as a holding that is more than 5% of their total portfolios. This kind of trust put into a company by such a large amount of hedge funds shows that many of the world’s greatest investors consider Micron to be a strong investment, and are also more than willing to put their money where their mouth is.

Micron is a high growth company with minimal risks, the largest of which is just speculation and can be disproved by a variety of factors. Large hedge funds are also heavily invested into the company, and its low valuation and high growth prospects lead it to boast an extremely favorable risk to reward ratio.

General Motors (GM) Undervalued

General Motors is probably best known for their previous bankruptcy, however, that has almost no resounding effect on the current conditions of the company. In the short-term, it massive recalls based on the ignition switch mishaps have driven the value of the company to extreme lows.

 Over-Reaction Due to Recalls Over Ignition Switches

The prevailing fear over these recalls has been that the company has tainted the long-term image of their company by failing to spot these failures before many deaths arose from them. Although a tragic event, these recalls will likely not have any resounding impact of the future of the company. A similar event to this already occurred to Toyota in 2009, and, although Toyota suffered like GM for a while, shares were soon back on track to growth and the company regained its reputation easily. Also, sales of GM following the recalls have been up to par, indicating that the recalls are not affecting customers’ decisions to buy GM vehicles.

Low-Valuation Based on Common Valuation Metrics

With a forward P/E ratio of just 7, far below the value of the overall market, and slightly under the average P/E ratios of most auto companies (which is currently 9 or 10), GM is being greatly discounted by the market in general. It’s P/S (Price to Sales) ratio is also a meager 0.34, and the company’s dividend yield is a good 2.80%, albeit with a lofty payout ratio of 68%. The dividend will likely be lower in the future, since, although the company probably will not willingly reduce their dividend, the share price could see considerable accumulation which would subsequently produce a lower dividend yield.

Large Investors Interested

Warren Buffett, David Tepper, and Mohnish Pabrai are three investors that are betting on GM’s growth in the future. The great part about these three investors, however, are that they all occupy completely different investing niches, but all find the same amount of value in GM. Buffett needs no introduction; as a long term investor it’s likely he cares very little about GM’s current low valuation. His long-term faith in the company, however, shows that it could make a very profitable long-term investment. David Tepper is a growth investor, and, having achieved 40% annualized gains for his hedge fund (Appaloosa) since its start in 1993, is a successful one as well. He likely sees GM as undervalued and having many growth opportunities, such as China, which spurs him to have GM as the third largest holding in his portfolio. Mohnish Pabrai is probably the lesser known of the three investors here. He is a ‘safe’ investor, meaning that he follows Graham’s teachings of margin of safety very profoundly. He likely sees the undervaluation of GM as an adequate margin of safety for his investment, which happens to be 22% of his entire portfolio and his second largest holding (comprised of warrants, options to buy into the company in the future, instead of actual stock).

GM is a well-run company that is exceptionally undervalued. It is also supported by three well respected and completely different large investors, meaning that it should be appealing to every kind of investor’s eye.

POSCO (PKX) Undervalued

POSCO is one of the largest steel companies in the world. It is headquartered in South Korea, and has seen a share price decline ever since the 2008 financial crisis because of an overabundance of steel production and an under abundance of demand.

Price to Book Value

POSCO’s P/B ratio sits at a modest 0.64, which is extremely cheap considering a company’s book value rarely will dip below the relative fair value of 1. POSCO’s 0.64 P/B ratio indicates a 50% undervaluation of the current share price, assuming the company does not increase its book value at all in the future. This scenario, however, is unlikely, as the company has demonstrated over a 25% annual growth rate in book value since for the past decade. The historical normal P/B ratio for POSCO is about 1.1, which is also much higher than the current amount.

Great Management and Underlying Company

POSCO is also known well for Warren Buffett’s praise (and investment) in the company. Although it doesn’t show up in Berkshire Hathaway’s list of holdings, that’s simply because the decline of the stock has probably put it to a holding size that the SEC doesn’t require Buffett to put in his list of holdings. His fondness of the company likely has to do with its stellar management, whose prowess has been shown time and time again by the various awards and accolades that the company has received for its success as a company guided by its good management. Also, POSCO, unlike many other raw material companies, is still very profitable, having earned upwards of $1.2 billion last year. The company also boasts a projected P/E ratio of just 13.

POSCO is an undervalued, unloved company because of its place in a weak industry. It is easily the best steel company out there, though, and should profit greatly off the stabilization of steel prices due to its immense undervaluation.

Coach (COH) Contrarian Play

Shares of Coach are down more than 50% since their highs in 2012, due to increased competition in their industry from the likes of Michael Kors, leading to falling American sales. The company now seems to be battered down to acceptable levels, leaving the fashion company undervalued as well as poised for success in the future.

International Sales Still Strong

Asian markets are still offering Coach incredible growth potential. Sales are being projected to grow 60% over the next five years in China and Japan. The company is aiming to open more stores internationally over the next few years, and establish their footprint there before any other competitors do. The company’s margins in China are also astoundingly high: over 70%. The company’s earnings in China contrast perfectly with those in North America; sales are projected to fall over 20% in North America in the next year, and margins remain at acceptable levels of about 20%.

New Designs

The company’s old bags have obviously fell out of fashion with customers, especially when compared to Michael Kor’s products. In order to respond to this fall in demand, Coach hired a new designer, Staurt Vevers, to try and get Coach’s products popular again. It’s up to consumers whether or not they buy Coach’s new products, but the hiring of Vevers does demonstrate that the company’s management is taking large steps to try and turn their company around.

Current Stock Conditions

Perhaps one of the most interesting factors of Coach’s stock is that their dividend has not been cut since their stock began declining. Although the company didn’t increase their dividend in 2014, their yield is still 3.90%, an above average yield, especially for a company in decline. Their net income and cash hoard are more than enough to support their dividend, as their payout ratio is just 41%, and the payout ratio based on future earnings projections is still only about 60%. They also have about $860 million is cash, and only $140 million in debts. The P/E ratio of the company is low, sitting at a trailing amount of 11. Profit margins are still positive, at 16%. All these factors show that the company is still profitable, with low valuations and a sustainable high yield. Shares are definitely not worth 50% less than their 2012 highs.

Coach is still an iconic brand that can find growth in emerging markets as well as in their new designer, Staurt Vevers. The current stock conditions are fair and show that the company is definitely worth more than it is currently valued at.

 

Walt Disney (DIS) Strong Investment

Disney is perhaps one of the most well known companies in America. And that gives it an impressive moat over its competitors.

Moat (Recognized Brand)

Disneyland is the trip of a child’s dream, and its not unlikely that their most favorite movie is not also a product of Disney’s. Not just appealing to children, however, Disney have found lovers among teenagers and adults that grew up watching their various movies. Disney also owns several recognized and watched channels as well, such as Disney Channel (obviously), ABC, and ESPN. The main emphasis, however, rests upon Disney’s ability to control their audience; a new classic Disney movie will surly always come with more publicity than any modern movie put to immense amounts of propaganda. Investors simply need to look to Disney’s latest release: Frozen, and the love it received from viewers just days after its release.

Current Company Condition

Disney has been growing their net income and EPS at an astounding rate since 2008, and has since then more than doubled these earnings metrics. This growth has been met with an equal growth in share price, leading it to trade at a fair valuation when compared to past levels. Investors should keep in mind, however, Disney rarely trades at a bargain price. The company’s growth and brand name is valued highly by investors, and therefore almost always trades at a premium to the overall market. Also, the company is only slightly shareholder friendly, but have yet to develop any stable dividend increase system (although they have been increasing, just rather randomly), or share repurchase programs (which have only occurred in slight amounts).

Disney is a great company with great growth and a great brand.

American Airlines Group (AAL) Poised for Success in the Airline Industry

American Airlines recently completed their merger with US Airways, giving them a prominent and powerful place in the rapidly growing airline industry.

Consolidation (Reduction of Competition)

The airline industry recently went through a series of acquisitions and mergers that left only a few big players in the mature market that actually command any real market share. American Airlines, United Continental, Delta Airlines, and Southwest Airlines are the four biggest airline companies and command the vast majority of market share. This low-competition feel gives all the growth to be had to these huge corporations, which should benefit them greatly.

Airline Industry Growth

The airline industry is on a tear, growing more than 100% on average in 2013. This growth is only set to continue into 2014 and 2015, as the economy becomes better and better, and oil prices maintain their slow, nearly flat growth. Some investors are afraid that tensions rising in Iraq could dramatically increase oil prices, but many of the airlines have already locked in their prices for the foreseeable future at the current levels, and a spike in prices wouldn’t drastically affect them until their contracts expire in 2015-16.

American Airlines (Most Undervalued Pick)

American Airlines is trading at a modest forward P/E ratio of just 6. While also able to boast the enormous returns the other airlines have posed in the past, it’s incredible that such a high growth company could trade at such a low valuation. Renowned hedge fund manager David Tepper currently holds American Airlines as his top holding, showing his faith in the company’s prospects. His fund (Appaloosa) has causally outperformed the S&P anywhere from 1 to 20% almost every year for the last decade. He also owns other airline companies, although none of them near as large of holdings as American Airlines.

New Capital Plans

With its new growth prospects and almost $8 billion in cash, American Airline’s management is looking for new ways to spend money, namely giving it back to shareholders. They recently announced a $1 billion dollar share buyback plan as well as their first divided in over 30 years. This shows management’s confidence in the company’s growth prospects following the merger with US Airways.

American Airlines is a market-dominant, undervalued, shareholder friendly company that has shown it can achieve over 100% gains every year. Investors would be insane to avoid this company and its growth prospects.

Berkshire Hathaway (BRK-A, BRK-B) Strong Investment

Berkshire Hathaway is famous for its CEO, Warren Buffett, widely held as the greatest investor of all time. The company is an insurance-backed conglomerate; they invest the float (premiums) generated from their insurance arm into various securities and companies, often buying entire companies outright.

Management (Warren Buffett)

Berkshire Hathaway has, arguably, the most skilled and intellectual management in the entire world. Their CEO is Warren Buffett, who is credited as the best investor of all time. He follows Benjamin Graham and David Dodd’s investing teachings, and has made himself the second-richest person in America through value investing. His right-hand man, Charlie Munger, is equally as skilled. He is the vice-chairman of Berkshire Hathaway, but also is chairman at another, extremely smaller, company: Daily Journal (DJCO). In the midst of the financial crash in 2009, Munger decided to convince Daily Journal to invest their excess cash hoard in some select stocks. His idea won approval, and Daily Journal’s stock price has risen over 300% since then.

Growth (Book Value)

Warren Buffett prefers to measure Berkshire’s growth through book value growth, not share price growth. Both of these measurements, however, have grown exceptionally since Berkshire’s IPO in 1980. It’s a tribute to Buffett’s ability to invest that Berkshire’s 5-year book value growth has never under-preformed the S&P 500’s growth rate. In terms of share price growth… if you bought a dollar worth of Berkshire Hathaway at it IPO and spent the same amount of money buying the S&P 500, Berkshire’s stake would be worth $700, while the S&P 500’s would be worth less than $20 (dividends reinvested).

 Risks

Berkshire Hathaway is probably one of the best companies in the world to invest in, and its risks are minimal and might not even be fully able to be considered as risks. Often, companies seem to always be searching for new ways to earn money and complain that they aren’t big enough to take on any massive operations that could earn them billions at a time. It is quite the contrary at Berkshire: Warren Buffett says Berkshire will probably not outperform as much as it did in the past for now, since the company is too big. This would cause him to under-perform, since it restricts the selection of companies there is to buy from. If you’re only managing a million dollars, then even spending all your money on one small company is easily manageable. However, if you’re investing the $100 billion Buffett is, then even a small 5% of your portfolio could end up eating up entire companies, and you still won’t feel you have enough. The larger your company grows, the larger and larger your acquisitions have to become, until you find your only able to buy the biggest companies in the entire stock market to fit your portfolio. Keep in mind, however, that is only an excuse for under-performance, not anything that will cause any harm to Berkshire Hathaway. Investors simply shouldn’t expect the outstanding performance Berkshire had over the ages to continue now.

Berkshire Hathaway is an outstanding company with outstanding management and outstanding growth. Many respectable hedge funds already hold it as their top holding, and investors would be prudent to buy as much of it as possible.