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.

 

Blackstone Group (BX) Undervalued

Blackstone is an asset management firm. It recently made a few of the companies they own go public: Sea World, Pinnacle Foods, Hilton, and Michael’s. The company is currently undervalued based on many factors.

AUM (Assets Under Management) Growth and Net Income Growth

Blackstone has been aggressively growing their AUM and net income over the past few years, ever since their company began to be profitable in late 2012. Since then net income has spiked from just $89 million to over $1.5 billion now. Also, its AUM grew to $278 billion in 2014, a growth rate of 21% from its 2013 AUM. Its share price, however, does not reflect this growth as it has remained relatively unchanged ever since the beginning of 2014, signaling that the company is currently undervalued based on their earnings and AUM growth relative to share price growth. This point is further made, since the current P/E ratio is only 15, and the forward P/E ratio of the company is a minute 9. A company with such  fast growing earnings and AUM should definitely not be trading at a fair current valuation and a heavily discounted projected valuation.

Asset Management Industry Growth

The asset management industry itself is poised for much growth in the future, as the alternative investments that Blackstone offers to their clients (real estate, private equity, bonds, etc.) have preformed well over the past few years, especially during the Great Recession, giving them much popular demand which in turn drives up the earnings of the companies that offer them as investments. Economic recoveries, such as the current economic condition, also drive up asset management and private equity earnings, as the retail investor makes up much of Blackstone’s clientele, and they typically must wait for an extended increase in the market in order to begin investing, such as now.

Blackstone is a fast growing company that is being undervalued by the market. Rarely do investors get the chance to buy such a market-dominant and fast-growing company at such a low price.

 

CNinsure (CISG) Undervalued by a Wide Margin

CNinsure is a rather small Chinese insurance company. Obviously, the first thoughts that come to mind when hearing the words ‘small Chinese company’ are probably quite negative, however, that simply means that others do not take the time to look into these kinds of companies, and us as investors can benefit greatly from them.

Total Cash Greater than Market Cap

One of the primary ways to measure the size of a company is by its market cap, which is mostly influenced by the company’s share price. The odd thing about CNinsure is that the company has more cash ($409 million) than its market cap ($348 million). This overwhelming amount of cash could serve as a very high margin of safety in buying into a relatively stable underlying insurance business, as their revenues have been increasing for over a decade straight, cutting right through the Great Recession like it was nothing. This excessive cash pile combined with such a sturdy business is almost unbelievable. I believe some knowledgeable investors would now be assuming that the company simply shorts stocks with its float from its insurance business, as that would require the borrowing of money to first sell the stock and buy into it again at a lower price, however, this is not the case, as the company did not state the cash in its annual report as ‘restricted cash’ which is the term for cash derived from un-covered shorts, meaning that this cash is both tangible and usable on short notice. The company also has no debt whatsoever, meaning that none of the cash was borrowed on loans.

Miscalculations based on ADRs

Keep in mind that this is a comparison of the cash of the company to the company’s ADR’s market cap, meaning that these are only the shares traded on the NASDAQ Global Fund, and the company could have more shares being traded on the SSE (Shanghai Stock Exchange), which would inflate its market cap. However, investors could then compare the company’s cash to their book value, since that would include all operations and does not change based on where it is being traded. Through this comparison, as the company’s book value is approximately $500 million, the cash of the company still makes up for 80% of the total book value, meaning that, when buying this stock, you are essentially only paying $100 million for a business that earned $19 million last year, equating to a P/E ratio of just 5. While the company still has many growth prospects ahead of them based on their past revenue growth. The reason many investors have not found this company yet is perhaps easily attributed to its tiny market cap in a foreign country that many investors prefer to avoid.

Update: I’ve asked the CNinsure company; they do not have any listing in China, so their total market cap is only the $350 million in America, rendering the entire third paragraph obsolete, although it is good knowledge to know anyway. This also further strengthens my argument and makes CNinsure even more undervalued.

CNinsure is an odd, small company in a country that is notorious for bad investments (China), however, the company itself seems unknown and unloved, and investors can take advantage of the public’s general avoidance of it to buy a company at a very cheap price.

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.

A Helpful Website Depicting the Movement of “Big Money” in Stocks (Dataroma)

Numerous hedge funds and mutual funds exist in the realm of the stock market, with some being big, and some being relatively small. Dataroma.com is a website that depicts all of these hedge funds and mutual funds and what they are all buying and selling.

It shows various things such as the current holdings of major investors:

Their buys and sells quarterly all the way back to 2006 and what they did the most recent quarter (just click the investor name on the home page),

The most bought  stocks in the last quarter and six months (boxes under Super Investor Stats),

The most owned stocks (S&P 500 Grid at the top),

The most owned stocks by percentages of portfolios (Grand Portfolio at the top),

Interviews and articles about the investors (scroll down on the investor’s portfolio page),

Investing quotes (right above the boxes, just refresh the page if you want another one),

Insider activity regarding stocks (bottom of the home page or type in the stock name in the search box in the top right hand corner and scroll down),

Individual analysis of stocks and how big investors have been buying or selling them (type in the stock ticker symbol in the search box),

How their portfolios looked like in the past (click on history in the investor’s portfolio’s page).

Be aware, however, that many stocks on the market, especially smaller companies, are not traded very much by these investors, as they invest millions, if not billions of dollars at a time, and could easily end up buying half the total shares outstanding of a smaller companies and still want more. Also, many of these investors tend to be long-term, value oriented investors, although not all of them, and so investors should not expect their buys to go up immediately after they buy, as many of them are probably long-term positions.

Deere (DE) Undervalued

Deere makes construction and farming equipment. The stock has the label of cyclical, since the share price tends to vary considerably throughout the course of time, often disregarding the movement of the overall market. Currently the company looks to be undervalued and is a strong play for the future.

Net Income and Share Price Disconnect

Naturally, the main form of a company’s capital gains result from gains in the earnings of a company: for a mature company, a 50% gain in net income would likely result in an approximately 50% gain in share price, although, as we know, the stock market is almost never so predictable. Multiple factors could influence the company’s share price gains besides earnings in the short-term, but, in the end, earnings normally take dominance in controlling the share price. This is why the P/E ratios of a company normally never deviate too much from the company’s historic mean, since its price and earnings grow at approximately the same rate. Deere, however, presents an astoundingly high disconnect between the share price growth and net income growth, which presents a good opportunity to buy the company. The current P/E ratio of the company is only 9, caused by an increase in net income that met with a stagnant share price movement. Since the beginning of 2011, Deere has seen a 50% increase in net income, although its share price has barely inched higher a couple of percentage points. If investors were to use EPS growth instead of net income, the earnings growth number would further increase because the company has also been aggressively buying back shares since that time. This coupled with the fact that Deere is a proven cyclical company points to a very strong buying opportunity, since the end of the bearish, or in this case, not bullish cycle will surly result in future gains once the P/E ratio is restored to its historic mean of about 14, representing an easy 50% percent gain in share price over any gain in earnings.

Future Population Growth and Finite Farmland to Support It

Deere is in a very powerful position in the world. The company provides farming and construction equipment to consumers and companies that need them. Specifically, the farming business of Deere should see considerable gains in the future, as a growing world population will require more efficient farming methods and machinery, products that Deere offers to customers. Growing population benefit all companies in general, but Deere specifically is poised very well in the farming machinery market by owning a considerable market share, while that industry can only see more and more accelerated growth in the future.

Shareholder Friendly (Somewhat)

Deere is not the classic Coca-Cola that returns billions to investors every year through consistent share repurchases and dividends, but the company has been increasing dividends for a decade now, and has instituted a reasonable share repurchase program starting a few years back. Since 2010, the company has reduced their shares outstanding by a full 25%, which does represent a considerable amount of their total float. The company also currently has a strong 2.60% annual dividend, which is easily supported by a 22% payout ratio. This factor is especially important, as the company can easily double their current dividend without harming the company’s cash flow too much. This represents ample dividend growth opportunity, combined with their past ten years of consistent increases, which could easily lead to a very fruitful dividend payout in the future.

Deere is a strong company that operates in an ever growing industry. The share price is currently being lowered by the market on account of the company’s cyclical nature, but the negative cycle seems to be over for the company. Investors should take this opportunity to buy into the company at a depressed share price to reap the rewards in the end.

Bank of America (BAC) Undervalued

Bank of America is the second biggest bank in America by assets and the third largest by market cap. Nevertheless, multiple factors have contributed to Bank of America becoming extraordinarily undervalued in comparison to both current market levels and its past valuations.

Litigation Issues (And Why They Really Don’t Matter)

The most recent plague to hit Bank of America are the litigation issues with the DOJ (Department of Justice). The company is being forced to give billions in cash to the government in order to make up for the mortgage issues that caused the crash of 2008 and the near-bankrupcy of the company. The current negotiations are standing at $17 billion in payments to the DOJ, with $9 billion in cash and rest to be paid later on. To put into perspective as to how much money that truly is, last year’s annual net income for the company was only a meager $10 billion, nowhere near enough to cover the payment to the DOJ. So where’s Bank of America supposed to get the money to pay the government? In its massive cash hoard. In an effort to not have a global crisis like 2008 again, the government is requiring banks to hold extreme amount of capital on hand instead of loaning it out to consumers. They then check the banks through an annual “stress test”, simulating a financial crisis similar to 2008 and seeing if the banks have the necessary capital to survive those kinds of recessions. Bank of America has well over enough money to pay back the DOJ in its cash pile, which sits at an incredible $524 billion. Unfortunately for investors, Bank of America cannot spend this money on operations, as it is not truly “their” money. Nevertheless, Bank of America has ample time to earn back the money they owe to the DOJ and get one of the largest settlements of all time off of its shoulders. The bank currently has minimal negative headwinds and should grow without hinderance in the future.

The Merrill Lynch Accounting Issue (And Why it Doesn’t Matter Either)

Bank of America, in the most recent release of their total capital for the government stress test, apparently overstated their total reserves in Merrill Lynch by $4 billion. Since the Federal Reserve now has to approve of all captial plans by banks, such as buybacks and dividends since many banks were too slow to cut their dividends in 2008 and further contributed to the overall decline, Bank of America had to resubmit their capital plan to the Federal Reserve, this time only asking for a dividend increase instead of a share buyback plan as well (which they already had approved before). Investors overreacted to this declaration and the stock is still nowhere near the highs they had before this issue was found and made public, but the Federal Reserve has already approved a dividend increase, but no share buyback. Long-term investors in the company shouldn’t mind this minor mistake by management, as their is not lasting effect on the company from this action. Unless you count a minor share buyback plan that would only reduce shares outstanding by 3%. I am confident in management’s ability to continue growing the company and I believe that by the next year they will have the neccesary capital to recieve both a dividend increase and a share buyback program.

Current Undervaluation (P/B Ratio)

The recent article on AIG showed that it was undervalued by 23% based on the price to book value. In short, this means that, when all the liabilities are subtracted from all the assets of the company, you come up with a figure 23% above the market cap of the company, so you can essentially buy every dollar the company owns for 72 cents. Incredibly, Bank of America is undervalued by the exact same amount as AIG, and the undervaluation probably stems from the same fact of both companies: that they nearly went bankrupt in 2008 and investors are still fearful of them. Us, as intelligent investors, can take advantage of this fear and be greedy, as Warren Buffett would put it, and profit off buying an undervalued company that others are too fearful to touch.

Bank of America is an extreamly undervalued company that seems to be being beaten down from every single direction right now. None of the current issues affect the long-term health and future of the company, however, and should be taken as a buying oppurtunity for when the company’s true value is found.

 

 

 

Some Notes On P/E Ratios Investors Should Never Forget

P/E Ratios and Debt

P/E ratios are an investor’s best friend when it comes to valuing a company, but what is debt’s relationship to a p/e ratio? Companies that have more debt tend to have lower p/e ratios, making them look like they have lower valuations while in reality, they just have more debt. This is because debt does not directly influence the market cap of a company, but still adds on to the total net worth of a company. Debt is basically just cash for a company, but doesn’t affect the market cap of the company. You never hear something like “Apple incurs fifty billion dollars worth of debt, shares soar ten percent”. Never blindly assume that a company has a low p/e ratio because it is undervalued, rather, take a look at the debt level, and if the company has an exceptionally high amount of debt relative to its market cap, then that might be the reason for the low p/e ratio, not undervaluation.

P/E Ratios and Non-Recurring Activities

When a company sells part of its business, the earnings for that quarter becomes artificially higher, since it earned money from selling some of its operations. This is not true earnings, however, and can make the P/E ratio look like it is low, while in reality it is not. A good way to look past this is to also look at the projected or forward P/E ratio, based on analyst projections for next year’s net income for the company, since that would not include the non-recurring selling of operations that is influencing the trailing P/E ratio.

P/E Ratios and Growth Prospects

Companies with high growth prospects tend to trade at higher P/E ratios. This is because investors are willing to pay a premium for the company they want to invest in, since they know it has potential to go up very fast in the future. This way, while net income (“E” in “P/E ratio”) may be low, investors are predicting that the net income is going to appreciate considerably in the future, resulting in a more normal P/E ratio. For example, if a company with a $1 billion market cap has high growth prospects for the future, and its current net income is $10 million, then its P/E ratio is 100. While that is considerably high in the current market conditions, the share of many technology companies commonly traded at those ranges in the 2000 tech bubble. Anyways, even though the P/E ratio is currently high, if investors believe the company has enough potential to earn $50 million annually in the future, then they are willing to pay the premium on the P/E ratio, since the new P/E ratio with the $50 million net income is just 20, a very controllable size. On top of this, those investors would earn from the upwards share price movements in the stock when it grows its earnings throughout the time period.

P/E Ratios and Investor Greed

Also note, however, that while earnings move upward, share price will too, and the share price will drive up the market cap of the company (“P” in “P/E ratio”). This in turn makes the P/E ratio remain at its high levels if the two numbers grow at the same rate. Unfortunately, no matter how fast the earnings of the company grows, it always seems to be the share price that grows faster, constituting an even higher P/E ratio, as investors expect the company to continue growing earnings at hyper-fast speeds in the future. In the end, many growth companies end at a place of extreme overvaluation and end up tanking, like technology companies in the 2000 crash. Investors should pay careful attention to the growth companies they buy, and use the P/E ratio to determine how much earnings would have to grow to get back into an area of fair price, while keeping in mind that market cap and share price will likely increase at the same time as well.

P/E ratios are an incredibly useful tool on the stock market, but they can be distorted in many ways. Investors need to be aware of these distortions and the causes of them, and therefore understand the true value of their equity holdings to the fullest extent.