The Poor Investor – Investigatory Value Investing

"Faber est suae quisque fortunae" -Appius Claudius Caecus

Tag Archives: ken fisher

Bull Markets, Mega Caps, and College Campuses

Sir John Templeton famously said, “Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” As we know right now, we are still no where near the “euphoria” stage, even though the markets have had an impressive run, with the S&P 500 alone up 15% YTD.

I would like to share a video with you from Davis Advisors that I think is helpful during this time. This may not be new information, but I think it’s good to have a refresher every so often, think of it as mental flossing:

Davis Funds: Insights

Also, according to Ken Fisher’s research, this “phase” of a bull market is usually best for mega-cap stocks. To his point, I do see value in companies such as Apple, Berkshire Hathaway, Eli Lilly, Sanofi, Proctor & Gamble, and Kimberly-Clark, to name a few.

I would also like to reiterate my “buy” recommendation on Heska (pick removed due to new information: 01/03/2013), Dell, Nvidia, and Atrion. Dell has been particularly attractive as of late as it hit a new 52-week low which it has since bounced off of quite nicely. I hope you took advantage, as my readers, and picked up shares along with me.

I would also like to add one more recommendation: American Campus Communities. Ron Baron explains the moat:

“There are five million obsolete college campus housing units that need to be replaced and renovated. Colleges can’t afford to do this. That’s the growth opportunity. American Campus is the largest provider of such housing with nearly 70,000 units. It builds and owns housing on college campuses with 80 year land leases that prevent others from competing against them.”

Not to mention, the company has an 11% profit margin and a 3% dividend. Also, as housing comes back, this stock will rise with the tide. Revenue and operating cash flow have steadily increased over the past 10 years (10-year average for revenue: 25.35%) while operating margins have remained near 18-25% during this time. With a moat firmly in place, I see no reason for this not to continue.

What I would not be holding now: bonds, gold, cash.

Disclosure: Long DELL & NVDA

Where to Look for Opportunities

In light of the recent plunge in Green Mountain Coffee Roasters’ (GMCR) share price, I thought it rather fitting to talk about where to look for opportunities in the stock market.  In my opinion, there are always opportunities out there.  Sometimes they’re hard to find, such as Vermillion, sometimes they’re right out in front of you, such as GMCR.  However, the real crux of the situation lies in deciphering whether they’re good opportunities, like buying shares of BP after the spill turned out to be, or bad ones, like buying shares of Kodak.  In choosing one versus the other, I’ll leave that up to you.

So just where do we find opportunities in the market?  Well, the question may not always be best posed as “where,” but instead, sometimes, as “when.”  The easiest when to look for opportunities is during a bear market, like the one that just occurred in the 2007-2009 period.  During this time, untold numbers of stocks were dirt cheap.  Berkshire Hathaway, perhaps one of the safest investments (perhaps even safer than US treasuries) was selling at nearly half of today’s price.  Another when is during a period of extreme panic or distress for an individual company, such as is the case of the aforementioned shares of GMCR, BP, and EK.  Even whole industries succumb to such malaise from time to time.  Coal, for example, is one such industry; shares of Peabody Energy Corp. and Arch Coal could prove to be bargains at these prices.  During a company’s turnaround also provides another when for shareholders looking for opportunities.  Successful turnarounds such as Ford Motor Co. and Nautilus Inc. (chart) come to mind here.

Sometimes market opportunities are pretty obvious.  Look for companies that are buying back their shares.  Warren Buffett bought IBM while it was reaching new highs partly due to the company’s diligent use of capital to buy back its own shares.  Look for companies trading below book value, below sales, with high dividend yields, at low price-to-earnings, low price-to-cash flow, near current company cash levels, and those growing at high returns on capital.  Current stocks that fall into some of these categories are names such as Hewlett-Packard, Chevron, and Exxon Mobil.  Companies on the verge of merging and those that are going private may also provide more obvious opportunities for investors.  US Airways, on the verge of a merger with American Airlines, could provide one such opportunity.

Sometimes the opportunities aren’t so obvious.  Companies that are on the bleeding edge of technology or the verge of new breakthroughs are of this type.  Vermillion, for instance, shot through the roof when it received FDA approval for its OVA1 cancer test.  Dendreon (DNDN) also saw its shares soar after receiving FDA approval for its cancer drug, Provenge.  In these instances, knowledge is your most important ally.  If you had followed the latest cancer research, as well as all the companies involved, with extreme dedication and focus, you may have also uncovered these opportunities.  Although these types of stocks can be found in any type of market, healthcare, biotechnology, cloud computing, and energy are some of the more common ones at this time.  Other less-than-obvious opportunities come in the form of companies exploring for vast natural resources or those that are highly leveraged, though these, especially the latter, require shrewd calculating as to what really is the risk-reward and whether or not its favorable.

The opportunities in the stock market are nearly limitless.  It all depends on the level of involvement you are willing to have to unearth them.  The list above is not nearly as exhaustive as it could be but hopefully serves as it was intended, to give you an idea of how to think about where to find market opportunities.  Don’t limit yourself to the obvious, as Ken Fisher says in his book, The Only Three Questions that Count, “Go crazy. Be creative. Flip things on their heads, backwards, and inside out. Hack them up and go over their guts. Instead of trying to be intuitive, think counter-intuitively—which may turn out to be way more intuitive.”  Sometimes finding opportunities means knowing where not to look just as much as knowing where to look.  And lastly, don’t mistake an opportunity for a good investment, only invest when the risk-reward is in your favor.

“Sell in May and Go Away!”

After reading this week’s Barron’s I saw an interesting little chart that showed the growth of $100 if the “sell in May” strategy were followed, also known as the Halloween indicator (original research paper).  Surprisingly, if you had followed a strategy of investing $100 in the S&P 500 since 04/30/45 during October – April periods versus May – September periods, your $100 would have turned into $9329 in the former period versus $99 in the latter.

The chart in Barron’s:

One would think, after seeing this chart, that selling in May, or maybe even April to get ahead of the curve, would be a prudent investment strategy.  However, if you extend the timeline out a bit more you get a picture that looks like this (this chart uses May-Oct. and Nov.-April, however, it is more representative due to the fact that the months are split 50/50, as opposed to 58/42 in the above chart):

Now, you may have noticed that November – April still outperformed.  However, clearly, if you had ignored the period from May – September you would have missed out on some nice gains during this time frame, as a buy-and-hold strategy through all periods worked best.  But what is the difference in periods due to?  If you look at the average returns by month since 1925, you’ll see quite readily:

It seems one of the major culprits is September.  So why not sell in September?

As Ken Fisher points out in his book “Debunkery,” from which this chart was first found, the two worst Septembers (which are notably in the May – October period) were down 29.6% in 1931 and 13.8% in 1937, due to the Great Depression.  All other months, on average, offered gains over the long haul.

What else accounts for the big downtrend in the May – October period:

  • Panic of 1901: May 17, 1901
  • Panic of 1907: October 1907
  • Black Monday: October 19, 1987
  • Friday the 13th mini-crash: October 13, 1989
  • Economic crisis in Asian: 1997 mini-crash: October 27, 1997
  • September 11th attacks: September 11, 2001
  • Internet bubble bursts: October 9, 2002
  • Global Financial Crisis starts: September 16, 2008
  • 2010 Flash Crash: May 6, 2010

To name a few…

Who is to say the next big stock market crashes won’t happen to coincide with April or July, the best performing months on average?

Bottom line: Don’t rely too much on statistical anomalies and try to “time the market” or you might be left holding the bag.

—-Written by: The Poor Investor

Who is Kenneth Fisher?

While I am sure many of you have heard of Philip Fisher, how many actually recognize the name Kenneth Fisher?  My guess is Ken will always be hidden, to a large extent, in his father’s shadow.  For us this is a good thing because his method of investing is better off largely hidden from the public eye, just as if you came across an abandoned gold mine you wouldn’t want everyone else knowing about it.

One of the reasons I decided to look into Kenneth Fisher in the first place is because I was sure that his father had taught him plenty about investing.  If you can’t learn anything more from Phil, who better than his son?  In fact, Forbes publishes Fisher’s stock pick performance and has shown he has beaten the S&P 500 11 out of 14 years (Fisher’s record)(full article).  In addition to being an excellent investor, he is also an accomplished businessman, author, and runs his own company, Fisher Investments.  On top of that, he’s a nice guy as well as a moral beacon for those of us in the business and investment world.  He is also on a mission to save the redwood tree.

Kenneth Fisher was the first value investor to use P/S ratios as an analytical tool.  However, instead of just casually glancing at them, Fisher used them almost religiously.  Fisher, today, largely believes that his P/S ratio method may be obsolete because of its widespread use.  However, given the extreme volatility of this market, as of late, I have found this method quite useful in finding undervalued companies.

In Fisher’s book, Superstocks, although he talks mainly about his P/S ratio methodology he also discusses some other important elements of successful investing.  He reiterates the use of scuttlebutt, Phil Fisher’s term for talking to all parties involved with a company from the CEO down to the janitor in order to find out critical information which might influence your investment in said company.  Another important element Fisher addresses is the stability of a company’s profit margin.  Fisher believes a company’s profit margin should be at least 5% and should not deviate significantly from this value in the downward direction.  A high stable profit margin, he believes, reflects that the management is doing its job for investors and always striving to beat competition.  Fisher strongly believes management is the most important aspect of any investment, echoing his father.  This belief has well-served many investors, Warren Buffet included.  The bottom line, if management is not committed and shareholder-friendly, two musts, then your long-term investments are doomed to failure.  He also discusses price-to-research ratios and this has helped me to identify a few stocks I would have normally written off more quickly (one that comes to mind in particular is Nanosphere).

In other writings he talks about how an investor’s worst enemy is largely himself, believing that investors are hard-wired to perform poorly.  Myopic loss aversion so drives investors that they sell too early and permanently lock in losses.  He also refers to the stock market as “The Great Humiliator” as it unabashedly takes money from anyone, rich or poor, without discrimination.  He has studied PE ratios and firmly believes they are utterly useless for investment analysis, a finding that John Neff would surely disagree with.  However, he strongly advocates earnings yields in evaluating the stock market (taking the PE and flipping it) to determine whether it makes sense for companies to borrow money to buy back their own stock. Fisher believes in the American economy and also believes that the trade deficit is nothing to worry about.  He believes an account deficit only indicates that the world thinks America is a better place to invest than any other.

When asked about his investment philosophy Fisher states:

“You’re not going to like what I’m going to tell you here. People have always believed that the kind of equity they invest in is superior to other kinds. ‘I’m a growth guy,’ ‘I’m a value guy,’ ‘I’m a small cap guy,’ ‘I’m an emerging markets guy.’ The fact of the matter is these people share a spiritual core with Osama Bin Laden.  They’re narrow minded fanatics. And, they miss the big picture. In the long term all major categories of equity must have almost identical real risk adjusted returns. Because if you don’t believe that, you believe that a category of equity is more powerful than capitalism itself.”

And with that I will leave you.

——Written by: The Poor Investor

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