One way to
learn about investing your own money is to do your own analysis on
investing advice from the pros. It's kind of fun to do a Rule #1
analysis on a list of stocks that some professional has just claimed
will be high return investments and find that the results of the analysis show you
that the stocks are either highly speculative or way overpriced.
And
it's even more fun when you discover an occasional wonderful business that's
on sale.
Jim Jubak writes a column on investing on MSN Money called
Jubak's Journal. Today (Dec. 7) he picks five stocks that should do
well as the dollar falls in value against other currencies. Let's take
a look at the five and see if any of them is a great business that's on
sale.
I'm going to use Investools to do the analysis because it's quick, but you can do the same thing on MSN or Yahoo.
Dynamic Materials (BOOM). They do explosion welding all over the world.
1. Trend:
The first thing I want to see is the long term trends
on the Big Five Numbers. ROIC is good then bad then good, while sales,
earnings, equity and cash are flat to down for years. But then all of
them took off in 2004 and they got rid of their debt. So lately this
thing looks quite good. I'd better really understand what's driving
this sudden growth, because I can't count on the history of the business
for predictability. Risky Biz.
2. Valuation:
Analysts average 18% for future growth, which,
compared with what it's been doing lately, looks quite conservative.
Rule #1 PE is 36 but historical PE is 26.
A quick look at year by year
high and low PEs tells a scary story. This business had high PEs of
under 10 for a couple of years and lately is running upwards of 70.
I'm going with the historical average of 26 here, but feeling shaky
about valuation.
I get a $66 stock that is priced today at $64.
But
really this thing could be worth a lot more. If I used 24% and a 48 PE
- both of which are defendable - I get a value of $200. My gut tells me
that this could be a good investment at its current price.
If I want
to take a shot at it, though, I'm going to have to get good at that
industry and probably even have to get good at predicting the future of
oil drilling, since that's where these guys do a lot of business. That
dries up, so do they, I'm guessing.
Since this area doesn't fall
within my circle of competence (described in Rule #1) and since I'm not up for the homework, I
have to say that I really don't know the value of this business and,
therefore, I don't really know if it's at a good price. Probably is,
but I just don't know for sure, and guessing is a great way to lose a
lot of money.
Especially with a business that can get a 7 PE someday.
Imagine what that would do to the price? Even with growth at 18%, it
puts the value in 2017 at $72. Ouch.
General Cable: (BGC): Makes cables for communications networks and utilities worldwide.
1. Trend:
This thing is a roller coaster that's been on a nice
climb lately, but it shows a historical probability of having a nice crash
sometime soon. And ROIC is under the minimum 10% for its whole 10 year
history.
2. Valuation:
With those trend numbers I couldn't tell you what
the long term growth rate would be.
Six analysts cover the company, but
only one is willing to put a long term growth rate on it at 16%. Brave
soul. Using that number with its historical PE of about... well, its
historical PE ranges from 2 to 100, so take your best guess. Investools
suggests 26.
And with that we get a $100 value on a stock selling for
$80 that could be worth anywhere from $20 to $200. Who knows.
Unless
you are an expert at this industry there is no way to put a price on
this business other than its break up value (equity) plus something for
being in business. Too much of a guess for me to even consider.
Middleby (MIDD): Makes restaurant heavy duty cooking equipment worldwide.
1. Trend:
This is a very nice trend for a Risky Biz portfolio
candidate. Need to understand the Moat here, but something good is
happening to these guys that is driving almost all their numbers pretty
much straight up from nowhere.
2. Valuation:
The long term guesses by four analysts range from
18% to 50% per year EPS growth. This is not so good for us, since it
tells us that four experts can disagree pretty massively about the
future for MIDD.
Still, even the worst case guy is going for 18%.
With PE ranging from 7 to 32, we're constrained about the multiple. As
much as I'd like to put it at 36, I'm going to keep it under its high.
Historical is 20, but that seems way low for a decent grower with good
long term Big Five numbers and no debt. Let's use 30.
And I get a
$112 business selling for $72.
Jack up the growth rate a tad and this
thing is in MOS range. That makes me think that if I want to get into
the restaurant business, this might be a good way to do it. If you
like this area you might want to do some homework on this industry and
company and tell us if it's looking good for the long term. Could be
something we all want to take a longer look at. Worth considering.
Pentair (PNR): water treatment equipment worldwide.
1. Trend:
Wobbly trends. With equity growing maybe at 10%, an
ROIC well below 10% and not so great operating cash flow, this on isn't
on my radar screen, even though they may be in a good growth industry.
Price would have to be the consideration here.
2. Valuation:
Analysts give it a rather solid 12% growth rate,
and that with a historical 20 PE combine to produce a $30 value for a stock
selling for $34.
Gonna have to really understand this one to be able
to jack the value up into the $60s. Doubt that I could get it that
high even if I really liked it. Not gonna happen.
Wabtec aka Westinghouse Air Brake (WAB): Makes stuff for railroad freight and transit cars.
1. Trend:
I'm not a fan of the disparity between the sales
growth at 5% and the excellent recent growth in the rest of the Big
Five, but this looks to be an up and comer on the increase in rail
business that got Buffett into rail stocks like BNI.
Could be worth a
longer look if you are inclined toward railroads these days, because the
recent trends are good with the important exception of sales. What's
up with that? You better know or don't go here.
2. Valuation:
I think the analyst expected avg. EPS growth rate
looks pretty good at 17%, and with a historical PE of 25, we get a
fairly conservative value of $64 on a business selling for $36.
Hummmmm.
This one has my attention because of their improving trends
and the big price to value disparity. If I wanted to be in rails, I'd
learn enough about this one to know that the sales issue isn't long
term, that the sales will catch up with the growth rate of the other
three. And if I were satisfied with that and with management, this one
looks like a buy right now. But remember to do your homework and to
know the industry and get real happy about the durability of these
numbers.
Phil Town says: "Now go play".
