I really appreciate John's email (read Part 1) discussing his analysis of Gamestop (GME) and Walgreens (WAG). I did a bit on GME in the last post. Let's talk about WAG here. John is getting whipsawed by using tech tools to buy and sell WAG. What he's missing is this: He has to figure out the value of the business before he buys anything and then he has to buy with a big Margin of Safety, MOS.
I get a value for WAG of about $44 and a MOS for WAG at about $22 a share. Here's my starting point for figuring that out: Book value per share growth rate of about 15% average (figuring back in dividends). Analysts put growth at 14%. I'll use that instead because its lower. WAGs been doing a high PE of about 18 lately but I'll use a bit higher than that since we're not selling until the market gets good. Let's say lower than the Rule #1 PE of 28 but higher than 18. Split the diff? Sure. 23. Start with the TTM EPS of $2.10 and grow it at 14% a year and we end up with the current Sticker Price or Value of $44.
If John was buying in recently he was buying pretty close to the retail value of the business and then hoping it would go up. It often will not, simply because the Big Guys can do the math, too, and can come to the same conclusion we do - the stock is at full price. When that happens, they either hold or sell, neither of which will make the price go up and the latter of which will give John ulcers because their selling or holding is causing the price to drop. So you guys have to do the work and get to a decent and conservative Sticker Price - or Value and then discount it. By the way, at the current price of $33, its going to take nearly nine years to get our money back. That's on the edge of not buyable for me. I recommend thinking about it at 10 year or less but only if the MOS is there and I like 8 years or less with an MOS. So if we don't have a good payback time and we don't have a good MOS so we don't buy. John had neither and got cut up by tech signals. No mas' amigo! MOS, PBT, wonderful business.
Now go play,
