Today we had our Monday Morning Investment Meeting, and as a firm we are amazed at the valuations that we are finding. Below you’ll find a sampling of some of our largest positions moving into 2012. Never before has it been so easy to find profitable companies, where earnings are likely to grow, at a huge discount to book value. The numbers are staggering and can only be attributed to the enormous amount of pessimism in relation to Europe and the global economy as a whole. In normalized times many of the companies below would trade between 1.3-3 times book value. We also looked at them from a forward earnings perspective and just about every company has a forward earnings yield between 10-20%. Even more compelling is that these companies aren’t in a cyclical hot spot, so we are really talking about trough earnings which are likely to be higher in 2013 than in 2012. Now remember that if you invert Forward Earnings you’ll get the forward earnings yield. So for instance on AGO the Forward P/E is 4.3 so the forward earnings yield is 23.26%. Would you invest in a AA- rated company that should earn you 23.26% on your money the first year, and is likely to grow moving forward? Every one of these companies is amazingly cheap, and are likely to grow profits once they get past some short term issues. Contrast that with the 30 year treasury which today is yielding 2.86% and has been one of the best performing assets in 2011. The reason treasuries have performed well is because investors are scared to an extent that they are pricing in the destruction of our financial system and Europe, and I think the odds of that occurring are extremely low. When you look at the forward earnings yields to these stocks versus the yield on treasuries, I can’t find a time in history when large cap profitable companies have ever been cheaper on a relative basis.
The only odd ball is SHLD which is a play on their tremendous assets and brands, as opposed to being a profitable company that is likely to grow earnings. Now stocks can stay cheap or get cheaper which we have seen, but history tells us it doesn’t take too long to correct to more normalized valuations. In a 3 -5 year period I would truly expect the below basket of stocks to rise by 75-100%. That might seem like a lot but that is what happens when you buy stocks that are out of favor but are extremely cheap if you are willing to hold through bad news. A perfect example are the managed care providers which have doubled from the lows they hit several years ago due to the fears prefacing Obamacare. We’ve been really encouraged to see a number of clients taking advantage of the fear in the markets to increase their investments at these levels, but we also understand that psychologically it can be difficult when you get a tough investment climate like we have currently. That of course is why we focus on education and communication so that you can feel confident and understand how you are positioned to benefit moving forward. Many of our clients were able to take advantage of the fears in 2009 to ride the bull market higher and to improve their financial condition significantly, and we think that the opportunity is even better than it was then due to the slowly improving economic fundamentals, and the improving housing demographics which should augur well for our financial system if we get any relief in Europe. As always if you have any questions whatsoever please don’t hesitate to contact us.
1) ABT- $54.33 Earnings Yield 10%, Dividend Yield 3.5%, likely to grow earnings by 8-10% a year
2) AIG- $22.55 Forward P/E 8.7, P/B Ratio .5
3) AGO- $12.99 Forward P/E 4.3, P/B .5
4) BAC- $5.02, Forward P/E 5.1, P/B .2
5) C- $24.86, Forward P/E 5.7, P/B .4
6) CSCO- $17.77, Forward P/E 9.2, P/B 2, $6 of net cash on the balance sheet
7) MSFT- $25.75, Forward P/E 8.4, P/B 3.6, Dividend Yield 3.08%
8) MS- $14.25, Forward P/E 6.8, P/B .5
9) SHLD- $45.61, P/B .6
10) HPQ- $25.36, Forward P/E 5.6, P/B 1.3
11) TEVA- $41.80, Forward P/E 10, P/B 1.7
12) TEF- $16.65, Forward P/E 7.6, Dividend Yield 10.14
13) BP- $40.78, P/E 5.6, Dividend Yield 4.06%, P/B 1.2
14) RIG- $39.54, Forward P/E 11.7, P/B .6, Dividend Yield 7.93%
15) NVS- $56.35, Forward P/E 10, P/B 2.1, Dividend Yield 3.61%.
INVESTING IN THE FINANCIAL MARKETS INVOLVES RISKS. OPTIONS ARE NOT SUITABLE FOR ALL INVESTORS.