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.

 

 

AT&T (T) Strong Investment

AT&T is a well-recognized and market-dominant telecommunications company.

Dividend (Consistency and Yield)

Not many companies can boast a yield over 5%, and even fewer can say that they have increased that dividend for over 25 years in a row. That’s right- AT&T is a dividend aristocrat that also pays the highest dividend in the Dow Jones Industrial Average. AT&T has increasing their dividend for 30 years straight now, and also offers an extremely high yield to accompany its DGI (Dividend Growth Investing) appeal. It’s payout ratio also does not bring up much alarm; it currently sits at 54%, which would seem less appealing in a lower-yielding company, although for AT&T is is quite enough to support the high yield. Investors would be prudent to buy this company, perhaps as a bond substitute, as the current situation with bonds is, at the least, extremely risky. Renowned investor Warren Buffett has already called bonds the “riskiest play in the market” right now, as interest rates have nowhere to go but up, and so bonds would have to go down to support the higher yields. AT&T can substitute bonds in one’s portfolio, as it already pays a higher dividend that most non-junk bonds. The underlying company is also highly profitable and poised for growth.

Low Valuation (P/E Ratio)

With a trailing P/E ratio of 10, AT&T is not the least bit pricey, especially considering that the S&P is trading at a P/E ratio of 16. Also, revenues and net income have been steadily increasing for the past 3 years, although before that earnings were rather all over the place. This shows that the company has stabilized and will probably continue its slow and steady growth into the future, therefore giving management even more money to return to shareholders through dividend increases and payouts.

DirecTV Merger (Bundle Options)

The DirecTV merger is revolutionary for AT&T. The merger creates a cable-telecommunications hybrid from what used to be two distinctively separate companies. This is extremely helpful to AT&T, as before it had very few options to offer any bundle offers, and therefore could not compete with the likes of Verizon, that already had a major foothold in both industries. Now its competitiveness much more powerful, and DirecTV’s aggressive subscriber growth should be able to bring massive cash flows to the company.

Risks (Sprint)

Sprint is poising itself to become a major nuisance in the telecommunications market. The company seems to be trying to initiate a major price war among the dominant companies, hoping to gain back precious market share through its new “disruptive prices”. Disruptive is probably the best word for the endeavor, as it will probably end up having no effect on any of Sprint’s market share, but will only force AT&T and Verizon to lower their prices in response, lowing their margins and decreasing earnings for as long as Sprint keeps it up. However, investors can take advantage of this perceived short-term weakness to buy into AT&T at a depressed share price, which would also only increase its dividend yield even more.

AT&T is a strong company that is trading at very low valuations and pays at a gigantic dividend that the company has sustained and increased for decades. The merger with DirecTV gives the company access to growth that it never had before, and investors can expect management to take advantage of these new avenues of growth to their fullest extent.

 

US Bancorp (USB) Strong Investment

 

US Bancorp is a super-regional bank that is conservative, simple, and not overvalued: three things that quite simply make the one of the best investments ever.

Conservative Management

With the big four banks constantly getting into trouble with the DOJ (Department of Justice) over mortgage problems stemming from the 2008 financial crisis, US Bancorp is surprisingly absent from the headlines. Management prefers to be quiet about their lawsuits or not even have them at all, therefore allowing themselves to avoid billions in fines that the big banks simply can’t avoid. This conservatism gives US Bancorp a huge edge over its competitors, whose notoriety in the banking sector only get worse and worse. Even in times of huge crisis and recessions, US Bancorp’s management tries their best to follow the rules and not take speculative ventures that often end up hurting the long-term.

Simplistic Business Structure

Like Wells Fargo, US Bancorp follows and extremely simplistic business structure: they take in deposits from customers and loan that money out to other customers (at a way higher interest rates). There is no complexity involved, unlike companies like Bank of America or JPMorgan, whose involvement in investment banking and other ventures almost always get them into trouble or cause extremely high volatility. Simplistic business structures allow management to focus on what they are doing and not get constantly sidetracked by whatever pops up along the way. This way, they can further avoid catastrophes like 2008 from affecting them too much, since management can keep track of the the going-ons at the bank, and make sure they aren’t taking any risky ventures.

Shareholder-Friendly

Although perhaps not a dividend aristocrat or an aggressive share buyer like IBM or Coca-Cola, US Bancorp has been buying back share since 2011. Although this only reduced their total shares outstanding by a meager 5% to now, it does show that management is striving to return capital to shareholders. Dividends, as well, have been mediocre, and have only been increasing every year since 2011 as well, however, as all bank capital plans have to now be approved by the Federal Reserve before being put into action, one shouldn’t expect an overwhelming amount of share buybacks or anything more than modest dividend increases for the foreseeable future.

US Bancorp is currently fairly valued, trading at its long-term P/E ratio of 13. The company is excellently managed and boasts a simple, yet effective business structure.

 

Exxon Mobil (XOM) Trading Below Historic P/E Ratios

Exxon Mobil probably doesn’t need an introduction; it’s the biggest energy company in the world by market cap and is one of the most recognized and prominent in the entire world.

Historic P/E Ratios

Take a look at this chart…

It starts right after the era of stagflation in the 1970s when Exxon Mobil had its P/E ratio driven extremely low. Disregarding that, the company’s long-term average P/E ratio seems to be around 15, quite the same as the overall market. but investors can also see that a P/E ratio of 20 or even 25 is not un-achievable, as it has reached those prices in the past. Both of these projections are higher than the current P/E ratio of 13, with 15 allowing for a 15% share price gain with no increase in net income, and a P/E ratio of 20 allowing for a 50% increase in share price with not movement in net income. Also keep in mind that the forward, or projected, P/E ratio for Exxon Mobil is 12, representing analysts feeling bullish on a gain in net income for the company.

Shareholder Friendly

As always, we as investors have to look at how shareholder friendly the management of the company is, especially if it can sustain dividend streaks for a long time. Exxon Mobil seems to fit the bill, with a dividend streak lasting 31 years, giving it the title of a dividend aristocrat, and an excellent share buyback program. Since 2003, Exxon Mobil has decreased their shares outstanding by over 30%, or 2.5 billion shares. This repurchase program was relatively uninterrupted, save 2009 and an early part of 2010, which were just a result of the aftershocks of the 2008 financial crisis.

Exxon Mobil is a company that is trading at a very low P/E ratio right not compared to historic norms. The company is also shareholder friendly and it should be a great investment going forward. Did I mention that Warren Buffett took a huge stake in the company not too long ago?

TJX Companies (TJX) Further Competitive Advantage

My older post on TJX (click), showed how TJX should have the power to outperform in the case of a recession. In addition to that, TJX’s competitive advantage gives it significant power over its competitors to outperform.

Inventory Turnover Rates

TJX utilizes incredibly high inventory turnover rates in order to beat out their competition. Put simply, inventory turnover rates are the rates at which companies have to restock their products and buy new ones to replace their old ones. TJX buys a rather smaller amount of merchandise at one time, always only buying what is in fashion for their customers. After the customers buy their products, TJX restocks them almost twice as often as other retailers. This gives them the ability to always have what’s in fashion on their store shelves, and get in early on fads and other consumer desires before other retailers join in the game. In basicallity, there seems to be an extreme flaw in this strategy, as other retailers could simply choose to buy less products at one time and restock their inventories more often, therefore replicating TJX’s competitive advantage. This, however, is not possible, as TJX specifically designs all of their stores without walls or any form of enclosures, allowing their to expand or contract sections of their store depending on what the consumers want at that give time. For example, in the back to school season, TJX could easily expand their kid’s clothing section and cut back on something like adult’s clothing simply by expanding their kids section by using the adult clothing shelves. Other retailers, however, could not do this, as they build their stores with walls and enclosures, forcing them to keep their sections separate and unchangeable.

International Business Machienes (IBM) Strong Investment

IBM is a one of the largest technology companies in the world. The company is facing substantial headwinds right now in the form of lower revenues, but it is mainly a short-term concern that investors should take advantage of and buy on the dip.

Shareholder Friendly

IBM spends billions every year buying back its own shares, and has one of the largest share-repurchase programs in the entire market. This builds shareholder value over time, as there are less shares outstanding to evenly distribute gains among, so that each share earns more of a percentage of the total company’s earnings. The company began repurchasing their own shares in 1995 and has since then halved their total shares outstanding by reducing an average of 50 million shares from its total shares outstanding yearly (adjusted for splits). This massive repurchase program has continued through thick and thin, pausing only slightly during the 2000 tech bubble for one year. The company did not pause their buying spree in 2008, however, and therefore succeeded in buying back their company’s stock when it was cheap, allowing for a set amount of money to be able to buy back more shares than if the share price were to be more expensive. The company has also increased their dividends for 18 years straight, and it currently sits at an acceptable 2.4%. Also, the company’s payout ratio is considerably low, at a modest 24% of its annual net income. This is important, since low payout ratio companies with medium to high dividends tend to outperform in the long-term, as demonstrated by many studies in that area. Investors should keep in mind, however, that IBM’s management prefers to create shareholder value through share repurchases, not dividends. Therefore, the majority of created growth in IBM is intangible, since it is being driven with share repurchases. Only the EPS numbers and company announcements will reflect how much of an impact the repurchases have had on the company’s stock.

Strong Moat (Competitive Advantage)

IBM has survived and thrived for many years through its competitive advantages. IBM’s main customers are large corporations that require its products for operations and are quite reluctant to change their usage of IBM’s systems. A good example of this is in China, where the Chinese government, fearful that U.S. technology corporations are spying on them for the government, is urging companies to change their operating systems from IBMs. The companies response was that there was little to no alternative to IBM’s systems, which are the only ones with the processing power to carry out their data. They also stated that it would take too much restructuring and change that is completely unnecessary. In America and other countries this effect exists as well, and with IBM being the most recognized brand in its industry, companies will tend to stick to it as it gives companies satisfactory results.

Current Condition of IBM’s Stock

Investors absolutely detest IBM’s stock right now. The company was the worst Dow performer in 2013, and was also the only company that was negative at the end of the best year for stocks in more than a decade. This was due to revenue concerns by investors, since revenues have been flattening out and falling in the past few years. This was completely unexpected, as IBM is such a large corporation that should be able to generate steady cash flows and increase revenues over the long-term. Investors in the company, however, need not worry about these issues, as the company is currently going through an immense restructuring program that will leave it as a primarily software company, instead of its old position as a technology hardware company. This is a great idea from management, as there is much room for growth in areas such as the cloud right now, and IBM is trying to poise itself to profit from that growth. The company’s management is also very productive and knows what it wants to do. This is shown by the company’s 5-year “road maps” that take the form of EPS (Earnings Per Share) projections into the future. Management sets very high expectations for the company and works to met those expectations in the future. The company well surpassed their last 5-year road map, and are well on their way to a $20 EPS in 2015 (the company had $16.26 in EPS numbers in 2013).

Investors should recognize that IBM is extremely undervalued at this time, and right now represents a great time to buy into an undervalued and strong tech giant.

 

The TJX Companies (TJX) Another Good Buy For a Recession

TJX is a parent company that owns many off-price discount retailers. Marshalls, TJMaxx, and Home Goods are it three U.S. names, and it also owns multiple foreign discount retailer names.

Business Model (Discount Retailer)

TJX focuses on selling fashion and home fashion names for discounted prices, offering consumers the ability to purchase comparable merchandise for cheaper costs than leading retailers. This business strategy is strongest when other companies are the weakest: recessions. While still focusing on fashion shopping, consumers may find themselves stranded for money during recessions, and TJX allows them to buy what they want for cheaper prices. TJX’s stock price easily outperformed the overall market indices during the 2008 Great Recession as well as the recession in 2000. Discount retailers have gained considerable admiration from investors and customers alike in the past few years, depicted by the company’s rapid upwards share price movement as well as uptrends in revenues and net income easily surpassing the market averages. This will help TJX considerably in the next recession, as it is now much more recognized than it was before, which will contribute to more customers turning to the company when hard times hit.

Shareholder Friendly (Buybacks and Dividends)

The company is also remarkably shareholder friendly through stock buybacks and consistently increasing dividends. The company has increased their dividends for over 15 years and show no signs of slowing or cutting their dividend. In fact, the low payout ratio of just 20% shows that the company has much room to grow their dividend and continue their streak. Also, the company has been aggressively buying back their own stock for over 15 years as well, and have almost halved their shares outstanding since that time point. The company consistently builds long-term shareholder value through dividends and stock repurchases, and will likely continue this trend in the future, as there are no foreseeable headwinds for the company, and it cash flow and revenues remain strong as ever.

Current Share Price Conditions (Lower Consumer Spending)

The current share price of TJX is not doing considerably well. After having a large run-up since 2008, shares have been very lackluster in the past few quarters as lower consumer spending has hurt both earnings and future prospects for the company. Of course, all of this is completely irrelevant to the company’s long-term ability to grow, and investors should view these minor short-term problems as a buying opportunity into a strong company that trades at a 16% discount to its peak prices a few months ago. Consumer spending for certain will pick up in the future, and investors need not to worry that the current short-term headwinds will hurt TJX in the long-term.

TJX is one of the most shareholder friendly companies I have ever seen that also offers great growth potential and protection against recessions. All investors should consider the company as a holding in their portfolio.

American International Group (AIG) Trading at a Large Discount to Book Value

AIG is an insurance company that has operations all around the world and in the United States. The company was hit extremely hard in 2008 due to its insurance against CDO (collateralized debt obligation) defaults. This in turn caused the company to get hit hard in the housing bubble, when  it had to pay back almost all of its customers. The stock dropped 95% in a matter of months and the company had to get bailed out by the government. Investors even now are avoiding the company just because of these catastrophic losses. This is an oppurtunity for you and me.

Undervaluation (Low P/B ratio)

The company’s current P/B (Price to Book) ratio is a measly 0.72, meaning that the company’s total assets minus liabilities is currently higher than the market cap, meaning that you’re buying the company for less money than everything it owns minus everything it owes, meaning that you’re essentially paying 72 cents for every dollar worth of the company. Now, this sounds like a real bargain deal: automatically earning 50% on all of your money invested? Is that even possible? Essentially, that is what this low P/B ratio would mean, however, there is always the possibility, however small, that the company will get hit again like in 2008 and drop another 95%, or stay at this low P/B for years, if not decades to come. More likely, the company will slowly grow back to a P/B ratio of about 1, perhaps faster than the market, perhaps not, but AIG definitely remains severely undervalued for the insurance giant it is, and share prices should be much higher than they currently are.

Growth Driver (Share Buybacks)

Essentially share buyback programs are just made to increase the amount of money each investor earns for every dollar the company earns, since there are then less shares to divide up the profits to. Many great investors, including Warren Buffett, advocate for share buyback programs in companies, but only when shares are cheap. There is no better waste of a company’s money than initiating share buyback programs when shares are at their peaks. unfortunately, when shares are at their peaks is typically when the company is doing the best and generating the most profits, so naturally they decide to make a share buyback program with the extra money at the worst possible time. Then, when the recession rolls over and the share prices drop 50%, companies find that they don’t have the money anymore to fund a share buyback program, and, while they could’ve bought back double the shares in the recession, they chose to do the buyback program when their shares were dramatically overpriced. Fortunately for investors, AIG’s stock is fundamentally cheap on valuations, and their management, recognizing this, is doing the smart thing and initiating large share buyback programs to reduce the share count now, before prices go up. They have already approved a $2 billion share repurchase program on June 5th, 2014, which will reduce their total shares outstanding by 4-5% this year alone.

In conclusion, AIG is a great company trading at a very depressed price to book value, which will definitely increase in share price in the months and years to come. The company is taking large lengths to reinstate their dominance in the insurance industry after the collapse in 2008, and management is buying back stock at a very opportune moment, creating long-term shareholder value in a great company.